Commercial mortgage banking

The Commercial Mortgage Banking segment, which operates out of OMHHF, became a discontinued operation during second quarter of 2016. See Note 3 for further details.

Loan Origination Fees

OMHHF recognizes origination fees and other direct origination costs when it enters into a rate lock commitment with the borrower. The origination fees and other direct origination costs are recognized when OMHHF enters into a commitment to sell loans to third parties. In accordance with Housing and Urban Development ("HUD") guidelines, OMHHF will, with HUD's approval and for certain loan programs, apply the premium income towards the payment of prepayment costs that customers will incur on their prior mortgage. These costs are netted with revenues from premium income that are otherwise earned from these loan refinancings or modifications. Prepayment costs recorded as contra-revenue against premium income was $nil and $6.5 million for the three and nine months ended September 30, 2016, respectively ($4.9 million and $20.9 million for the three and nine months ended September 30, 2015, respectively).

Funding Commitments

OMHHF provides its clients with commitments to fund FHA-insured permanent or constructions loans. Upon providing these commitments to fund, OMHHF enters into TBA sale contracts directly or indirectly with counterparties to offset its exposures related to these funding commitments. See Note 6, Fair value measurements, for more information.

Loans Held For Sale

OMHHF advances funds from its own cash reserves in addition to obtaining financing through warehouse facilities in order to fund initial loan closing and subsequent construction loan draws. Prior to the GNMA securitization of a loan, a loan held for sale is recorded on the condensed consolidated balance sheet. Loans held for sale are recorded at fair value through earnings.

Escrows Held in Trust

Custodial escrow accounts relating to loans serviced by OMHHF totaled $2.4 million at September 30, 2016 ($421.5 million at December 31, 2015). These amounts are not included on the condensed consolidated balance sheet as such amounts are not OMHHF’s assets. Certain cash deposits at financial institutions exceeded the FDIC-insured limits or other institutionally provided insurance. The combined uninsured balance with relation to escrow accounts at September 30, 2016 was approximately $1.6 million. OMHHF places these deposits with major financial institutions where it believes the risk is minimal and that meet or exceed GNMA required credit ratings.

The total unpaid principal balance of loans the Company was servicing for various institutional investors as of September 30, 2016 and December 31, 2015 was as follows:



(Expressed in thousands)
	As of September 30, 2016		As of December 31, 2015
Unpaid principal balance of loans	$	26,149	$	3,974,292

Mortgage Servicing Rights (“MSRs”)

OMHHF purchases commitments or originates mortgage loans that are sold and securitized into GNMA mortgage backed securities. OMHHF retains the servicing responsibilities for the loans securitized and recognizes either a MSR asset or a MSR liability for that servicing contract. OMHHF receives monthly servicing fees equal to a percentage of the outstanding principal balance of the loans being serviced.

OMHHF estimates the initial fair value of the servicing rights based on the present value of future net servicing income, adjusted for factors such as discount rate and prepayment. OMHHF uses the amortization method for subsequent measurement, subject to annual impairment. See Note 6, Fair value measurements, for more information.

The fair value of the servicing rights on the loan portfolio was $273,000 and $41.8 million at September 30, 2016 and December 31, 2015, respectively (carrying value of $268,000 and $28.2 million at September 30, 2016 and December 31, 2015, respectively). The following tables summarize the changes in carrying value of MSRs for the nine months ended September 30, 2016 and 2015:



(Expressed in thousands)
	For the Nine Months Ended September 30,
	2016			2015
Balance at beginning of period	$	28,168		$	30,140
Originations	789			5,726
Purchases	301			675
Disposals	(1,753		)	(6,118		)
Sale of MSRs	(27,193		)	—
Amortization expense	(44		)	(829		)
Balance at end of period	$	268		$	29,594

Servicing rights are amortized using the straight-line method over 10 years. Estimated amortization expense for the next five years and thereafter is as follows:



(Expressed in thousands)
2016	$	8
2017	33
2018	33
2019	33
2020	33
Thereafter	128
	$	268

The Company receives fees during the course of servicing the mortgage loans. The fees for the three and nine months ended September 30, 2016 and 2015 were as follows:



(Expressed in thousands)
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
Servicing fees	$	80	$	1,463	$	2,944	$	4,384
Ancillary fees	8		47		162		241
Total MSR fees	$	88	$	1,510	$	3,106	$	4,625