Note 17. Mortgage Banking Activities

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

Components of Mortgage Banking Activities, Net


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2013		2012		2013		2012
Income from MSRs, net:
Income	$	2,991	$	231	$	5,785	$	368
Late charges		17		2		35		3
Cost of sub-servicer		(355)		(55)		(767)		(89)

Income from MSRs, net:		2,653		178		5,053		282

Changes in fair value of:
Residential loans, at fair value		(10,804)		14,976		(17,339)		14,992
Commercial loans, at fair value		3,171		-		2,826		-
MSRs		460		(650)		9,628		(1,194)
Sequoia IO securities		(1,866)		(4,427)		36,399		(9,101)
Risk management derivatives ⁽¹⁾		442		(2,385)		51,010		(8,784)

Net market valuation adjustments		(8,597)		7,514		82,524		(4,087)

Net gains on residential loan sales		-		4,611		-		17,447
Net gains on commercial loan originations		-		-		40		-
Net gains on commercial loan sales		-		-		10,991		-

Mortgage Banking Activities, Net	$	(5,944)	$	12,303	$	98,608	$	13,642

(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 nine months ended September 30, 2013, we transferred an aggregate $1.21 billion and $5.25 billion (principal balance), respectively, of residential loans to 11 Sequoia securitization entities and accounted for the transfers as sales in accordance with GAAP. As a result of these sales, during the three and nine months ended September 30, 2013, we recorded MSRs of $13 million and $41 million, respectively, at a taxable REIT subsidiary of ours. These MSRs represent rights we had acquired and retained to service $1.19 billion and $4.53 billion of loans transferred (original principal balance) to these securitizations during the three and nine months ended September 30, 2013, respectively. During the three and nine months ended September 30, 2013, we recorded MSRs of $1 million associated with $72 million of loans sold to third parties. During the three and nine months ended September 30, 2013, we purchased $3 million of MSRs associated with $307 million of conforming loan principal balance. Conforming loans are mortgage loans that conform to Fannie Mae or Freddie Mac guidelines. No MSRs associated with conforming loans were purchased or recorded during the three and nine months ended September 30, 2012. At September 30, 2013, the principal balance of the loans associated with our MSRs was $5.58 billion.

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

MSR Activity


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2013		2012		2013		2012
Balance at beginning of period	$	43,098	$	2,064	$	5,315	$	-
Additions		16,677		1,241		45,291		3,849
Changes in fair value due to:
Changes in assumptions ⁽¹⁾		1,353		(584)		11,665		(1,065)
Other changes ⁽²⁾		(894)		(66)		(2,037)		(129)

Balance at End of Period	$	60,234	$	2,655	$	60,234	$	2,655

(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.