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Mortgage Banking Operations
 3 Months Ended
Mar. 31, 2019
Mortgage Banking [Abstract]  
MORTGAGE BANKING OPERATIONS
MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.
 
(in thousands)
At March 31,
2019
 
At December 31,
2018
 
 
 
 
Single family (1)
$
360,496

 
$
321,868

Multifamily DUS® (2)
2,421

 
21,974

Small Business Administration ("SBA")
1,561

 
3,165

Total loans held for sale (1)
$
364,478

 
$
347,007



(1)
Includes loans from discontinued operations of $307.6 million and $269.7 million at March 31, 2019 and December 31, 2018, respectively.
(2)
Fannie Mae Multifamily Delegated Underwriting and Servicing Program ("DUS"®) is a registered trademark of Fannie Mae.

Loans sold proceeds consisted of the following.
 
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
 
 
 
 
 
Single family
 
$
993,619

 
$
1,550,724

Multifamily DUS® (1)
 
21,927

 
32,976

SBA
 
7,109

 
3,548

CRE-Non-DUS® (1)
 
135,035

 
—

Single family (2)
 
11,230

 
—

Total loans sold
 
$
1,168,920

 
$
1,587,248



(1)
Fannie Mae Multifamily DUS® is a registered trademark of Fannie Mae.
(2)
Loans originated as held for investment.


Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following.
 
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
 
 
 
 
 
Single family:
 
 
 
 
Servicing value and secondary market gains (1)
 
$
31,843

 
$
41,427

Loan origination and funding fees
 
3,645

 
5,445

Total single family
 
35,488

 
46,872

Multifamily DUS® (2)
 
534

 
1,146

SBA
 
375

 
301

CRE-Non-DUS® (2)(3)
 
1,751

 
—

Single family (3)
 
(53
)
 
—

Total gain on loan origination and sale activities (4)
 
$
38,095

 
$
48,319


(1)
Comprised of gains and losses on interest rate lock and purchase loan commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the Company's repurchase liability for loans that have been sold.
(2)
Fannie Mae Multifamily DUS® is a registered trademark of Fannie Mae.
(3) Loans originated as held for investment.
(4) Includes $35.5 million and $46.9 million from discontinued operations at March 31, 2019 and March 31, 2018, respectively.

The Company's portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. Loans serviced for others are not included in the consolidated statements of financial condition as they are not assets of the Company.

The composition of loans serviced for others that contribute to loan servicing income is presented below at the unpaid principal balance.
(in thousands)
At March 31,
2019
 
At December 31,
2018
 
 
 
 
Single family
 
 
 
U.S. government and agency
$
5,450,159

 
$
19,541,450

Other
602,235

 
610,285

 
6,052,394

 
20,151,735

Commercial
 
 
 
Multifamily DUS® (1)
1,435,036

 
1,458,020

Other
86,561

 
84,457

 
1,521,597

 
1,542,477

Total loans serviced for others
$
7,573,991

 
$
21,694,212



(1)
Fannie Mae Multifamily DUS® is a registered trademark of Fannie Mae.

The Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, appraisal errors, early payment defaults and fraud. For further information on the Company's mortgage repurchase liability, see Note 8, Commitments, Guarantees and Contingencies, of this Quarterly Report on Form 10-Q.

The following is a summary of changes in the Company's liability for estimated mortgage repurchase losses.

 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
 
 
 
 
 
Balance, beginning of period
 
$
3,120

 
$
3,015

Additions, net of adjustments (1)
 
253

 
610

Realized losses (2)
 
(117
)
 
(960
)
Balance, end of period
 
$
3,256

 
$
2,665

 
(1)
Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.
(2)
Includes principal losses and accrued interest on repurchased loans, "make-whole" settlements, settlements with claimants and certain related expense.

The Company has agreements with certain investors to advance scheduled principal and interest amounts on delinquent loans. Advances are also made to fund the foreclosure and collection costs of delinquent loans prior to the recovery of reimbursable amounts from investors or borrowers. Advances of $3.3 million and $2.5 million were recorded in other assets as of March 31, 2019 and December 31, 2018, respectively.

When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company records the loan on its consolidated statement of financial condition. At March 31, 2019 and December 31, 2018, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated statements of financial condition totaled $10.4 million and $37.7 million, respectively, with a corresponding amount recorded within accounts payable and other liabilities on the consolidated statements of financial condition. The recognition of previously sold loans does not impact the accounting for the previously recognized MSRs.

Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following.
 
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
 
 
 
 
Servicing income, net:
 
 
 
Servicing fees and other
$
17,357

 
$
18,451

Changes in fair value of single family MSRs due to modeled amortization (1)
(8,983
)
 
(8,870
)
Amortization of multifamily and SBA MSRs
(1,376
)
 
(1,049
)
 
6,998

 
8,532

Risk management, single family MSRs:
 
 
 
Changes in fair value of MSRs due to changes in market inputs and/or model updates (2)
(5,278
)
 
30,019

Net gain (loss) from derivatives economically hedging MSR
3,683

 
(30,977
)
 
(1,595
)
 
(958
)
Loan servicing income (3)
$
5,403

 
$
7,574

 
(1)
Represents changes due to collection/realization of expected cash flows and curtailments.
(2)
Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates, both of which affect future prepayment speed and cash flow projections.
(3)
Includes $3.6 million and $6.7 million from discontinued operations at March 31, 2019 and December 31, 2018, respectively.
All MSRs are initially measured and recorded at fair value at the time loans are sold. Single family MSRs are subsequently carried at fair value with changes in fair value reflected in earnings in the periods in which the changes occur, while multifamily and SBA MSRs are subsequently carried at the lower of amortized cost or fair value.

The fair value of MSRs is determined based on the price that would be received to sell the MSRs in an orderly transaction between market participants at the measurement date. The Company determines fair value using a valuation model that calculates the net present value of estimated future cash flows. Estimates of future cash flows include contractual servicing fees, ancillary income and costs of servicing, the timing of which are impacted by assumptions, primarily expected prepayment speeds and discount rates, which relate to the underlying performance of the loans.

The initial fair value measurement of MSRs is adjusted up or down depending on whether the underlying loan pool interest rate is at a premium, discount or par. Key economic assumptions used in measuring the initial fair value of capitalized single family MSRs were as follows.
 
 
Three Months Ended March 31,
(rates per annum) (1)
2019
 
2018
 
 
 
 
Constant prepayment rate ("CPR") (2)
19.84
%
 
13.61
%
Discount rate (3)
9.73
%
 
10.23
%

(1)
Weighted average rates for sales during the period for sales of loans with similar characteristics.
(2)
Represents the expected lifetime average.
(3)
Discount rate is a rate based on market observations.

Key economic assumptions and the sensitivity of the current fair value for single family MSRs to immediate adverse changes in those assumptions were as follows.
(dollars in thousands)
At March 31, 2019
 
 
Fair value of single family MSR
$
68,250

Expected weighted-average life (in years)
5.46

Constant prepayment rate (1)
14.67
%
Impact on fair value of 25 basis points adverse change in interest rates
$
(4,315
)
Impact on fair value of 50 basis points adverse change in interest rates
$
(8,695
)
Discount rate
9.80
%
Impact on fair value of 100 basis points increase
$
(4,974
)
Impact on fair value of 200 basis points increase
$
(14,492
)
 
(1)
Represents the expected lifetime average.

These sensitivities are hypothetical and subject to key assumptions of the underlying valuation model. As the table above demonstrates, the Company's methodology for estimating the fair value of MSRs is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.

In March 2019, the Company successfully closed and settled two sales of the rights to service an aggregate of $14.26 billion in total unpaid principal balance of single family mortgage loans serviced for Fannie Mae, Ginnie Mae and Freddie Mac representing 71% of HomeStreet's total single family mortgage loans serviced for others portfolio as of December 31, 2018. These sales resulted in a $774 thousand pre-tax increase in income from discontinued operations during the quarter. The Company plans to finalize the servicing transfer for these loans in the second and third quarters of 2019. In connection with the MSR sales, the Company has an obligation to reimburse the buyers for loan prepayments 60 days beyond the sales date and has established a reserve for this expected amount.

The changes in single family MSRs measured at fair value are as follows.
 
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
 
 
 
 
 
Beginning balance
 
$
252,168

 
$
258,560

Additions and amortization:
 
 
 
 
Originations
 
7,287

 
14,353

Sale of single family MSRs
 
(176,944
)
 
—

Changes due to modeled amortization (1)
 
(8,983
)
 
(8,870
)
Net additions and amortization
 
(178,640
)
 
5,483

Changes in fair value of MSRs due to changes in market inputs and/or model updates (2)
 
(5,278
)
 
30,019

Ending balance
 
$
68,250

 
$
294,062

 
(1)
Represents changes due to collection/realization of expected cash flows and curtailments.
(2)
Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates, both of which affect future prepayment speed and cash flow projections.

MSRs resulting from the sale of multifamily loans are recorded at fair value and subsequently carried at the lower of amortized cost or fair value. Multifamily MSRs are amortized in proportion to, and over, the estimated period the net servicing income will be collected.

The changes in multifamily MSRs measured at the lower of amortized cost or fair value were as follows.
 
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
2018
 
 
 
 
 
Beginning balance
 
$
28,328

 
$
26,093

Origination
 
630

 
934

Amortization
 
(1,266
)
 
(985
)
Ending balance
 
$
27,692

 
$
26,042



At March 31, 2019, the expected weighted-average remaining life of the Company's multifamily MSRs was 10.46 years years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.
 
(in thousands)
At March 31, 2019
 
 
Remainder of 2019
$
2,944

2020
3,864

2021
3,686

2022
3,441

2023
3,222

2024
2,945

2025 and thereafter
7,590

Carrying value of multifamily MSR
$
27,692