Note 17. Mortgage Banking Activities

The following table presents the components of mortgage banking activities, net, recorded in our consolidated income statement for the three and six months ended June 30, 2013 and 2012.

Components of Mortgage Banking Activities, Net


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2013		2012		2013		2012
Income from MSRs, net:
Income	$	1,943	$	123	$	2,794	$	137
Late charges		11		1		18		1
Cost of sub-servicer		(234)		(30)		(412)		(34)

Income from MSRs, net:		1,720		94		2,400		104

Changes in fair value of:
Residential loans, at fair value		(41,405)		-		(6,535)		-
Commercial loans, at fair value		(345)		-		(345)		-
MSRs		8,827		(527)		9,169		(544)
Sequoia IO securities		36,336		(5,363)		38,265		(4,674)
Risk management derivatives ⁽¹⁾		49,544		(3,282)		50,567		(6,398)

Net market valuation adjustments		52,957		(9,172)		91,121		(11,616)

Net gains on residential loan sales		-		5,471		-		12,836
Net gains on commercial loan originations		-		-		40		-
Net gains on commercial loan sales		3,854		-		10,991		-

Mortgage Banking Activities, Net	$	58,531	$	(3,607)	$	104,552	$	1,324

(1)	Represents market valuations of derivatives that are used to manage risks associated with our accumulation of residential and commercial loans.

Mortgage Servicing Rights

During the three and six months ended June 30, 2013, we transferred an aggregate $1.80 billion and $4.04 billion (principal balance), respectively, of residential loans to eight Sequoia securitization entities and accounted for the transfers as sales in accordance with GAAP. As a result of these sales, during the three and six months ended June 30, 2013, we recorded MSRs of $16 million and $29 million, respectively, at a taxable REIT subsidiary of ours. These MSRs represent rights we had acquired and retained to service $1.78 billion and $3.34 billion of loans transferred (original principal balance), to these securitizations or sold to third parties during the three and six months ended June 30, 2013, respectively. At June 30, 2013, the principal balance of the loans underlying our MSRs was $4.13 billion.

We contract with a licensed sub-servicer to perform all servicing functions for loans underlying our MSRs. The following table presents activity for MSRs for the three and six months ended June 30, 2013 and 2012.

MSR Activity


	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2013		2012		2013		2012
Balance at beginning of period	$	18,123	$	1,562	$	5,315	$	-
Additions		16,148		1,029		28,614		2,608
Changes in fair value due to:
Changes in assumptions ⁽¹⁾		9,506		(481)		10,312		(481)
Other changes ⁽²⁾		(679)		(46)		(1,143)		(63)

Balance at End of Period	$	43,098	$	2,064	$	43,098	$	2,064

(1)	Primarily reflects changes in discount rates and prepayment assumptions due to changes in interest rates.

(2)	Reflects the impact of MSR-related cash flows received during the period.