Residential Mortgage Servicing Rights

12 Months Ended

Dec. 31, 2019

The Company measures its mortgage servicing rights at fair value with changes in fair value reported in residential mortgage banking revenue in the Consolidated Statements of Income. The following table presents the changes in the Company's residential mortgage servicing rights for the years ended December 31, 2019, 2018 and 2017:


(in thousands)	2019		2018		2017
Balance, beginning of period	$	169,025	$	153,151	$	142,973
Additions for new MSR capitalized	25,169		29,069		33,445
Sale of MSR assets	(34,401)		—		—
Changes in fair value:
Changes due to collection/realization of expected cash flows over time	(25,408)		(24,533)		(23,059)
Changes due to valuation inputs or assumptions ⁽¹⁾	(19,375)		11,338		(208)
Balance, end of period	$	115,010	$	169,025	$	153,151

⁽¹⁾ The change in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.

Information related to the serviced loan portfolio as of December 31, 2019, 2018 and 2017 is as follows:


(dollars in thousands)	December 31, 2019			December 31, 2018			December 31, 2017
Balance of loans serviced for others	$	12,276,943		$	15,978,885		$	15,336,597
MSR as a percentage of serviced loans	0.94		%	1.06		%	1.00		%

In October 2019, Umpqua closed on the sale of $34.4 million in residential mortgage servicing rights for $3.4 billion of residential mortgage loans serviced for others. The Company continues to analyze the portfolio and anticipates another sale in 2020 in an effort to improve the overall profitability of the business and reduce potential future volatility from future rate changes.

The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in residential mortgage banking revenue on the Consolidated Statements of Income, was $42.2 million, $42.8 million, and $39.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Key assumptions used in measuring the fair value of MSR as of December 31, 2019, 2018 and 2017 were as follows:


	December 31, 2019		December 31, 2018		December 31, 2017
Constant prepayment rate	13.33	%	12.95	%	12.27	%
Discount rate	9.75	%	9.70	%	9.70	%
Weighted average life (years)	6.0		6.2		6.3

A sensitivity analysis of the current fair value to changes in discount and prepayment speed assumptions as of December 31, 2019 and 2018 is as follows:


	December 31, 2019		December 31, 2018
Constant prepayment rate
Effect on fair value of a 10% adverse change	$	(5,410)	$	(7,104)
Effect on fair value of a 20% adverse change	$	(10,403)	$	(13,651)

Discount rate
Effect on fair value of a 100 basis point adverse change	$	(4,366)	$	(6,438)
Effect on fair value of a 200 basis point adverse change	$	(8,418)	$	(12,398)

The sensitivity analysis presents the hypothetical effect on fair value of the MSR, due to the change in assumptions. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in an assumption to the change in fair value is not linear. Additionally, in the analysis, the impact of an adverse change in one assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.