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MORTGAGE BANKING OPERATIONS
 6 Months Ended
Jun. 30, 2020
Mortgage Banking [Abstract]  
MORTGAGE BANKING OPERATIONS MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.
 
(in thousands)
At June 30,
2020
 
At December 31,
2019
 
 
 
 
Single family
$
284,865

 
$
105,458

Commercial real estate, multi-family and SBA
18,681

 
128,841

Amounts attributed to discontinued operations
—

 
(26,122
)
Total LHFS
$
303,546

 
$
208,177



LHFS are valued at fair value, primarily single family loans, or at lower of cost or market, primarily commercial real estate loans transferred from held for investment.


Loans sold consisted of the following for the periods indicated: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Single family (1)
$
397,150

 
$
1,454,064

 
$
707,003

 
$
2,458,913

Commercial real estate, multi-family and SBA
48,622

 
151,662

 
331,079

 
315,733

Total loans sold (2)
$
445,772

 
$
1,605,726

 
$
1,038,082

 
$
2,774,646



(1)    2019 amounts include both continuing and discontinued operations.
(2) Includes 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 June 30,
 
Six Months Ended June 30,
(in thousands)
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Single family
$
28,288

 
$
33,549

 
$
46,119

 
$
68,984

Commercial real estate, multi-family and SBA
1,739

 
2,826

 
6,449

 
5,486

Amounts attributed to discontinued operations
—

 
(24,197
)
 
—

 
(59,685
)
Gain on loan origination and sale activities
$
30,027

 
$
12,178

 
$
52,568

 
$
14,785




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 balance sheets 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 June 30,
2020
 
At December 31,
2019
 
 
 
 
Single family
$
6,294,226

 
$
7,023,441

Commercial real estate, multi-family and SBA
1,678,906

 
1,618,876

Total loans serviced for others
$
7,973,132

 
$
8,642,317




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 June 30,
 
Six Months Ended June 30,
(in thousands)
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Balance, beginning of period
$
2,482

 
$
3,256

 
$
2,871

 
$
3,120

Additions, net of adjustments (1)
(211
)
 
251

 
(527
)
 
504

Realized losses (2)
(188
)
 
(270
)
 
(261
)
 
(387
)
Balance, end of period
$
2,083

 
$
3,237

 
$
2,083

 
$
3,237

 
(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 expenses.

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 $3.8 million and $2.5 million were recorded in other assets as of June 30, 2020 and December 31, 2019, 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 balance sheet as LHFI. At June 30, 2020 and December 31, 2019, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $21.7 million and $9.4 million, respectively, with a corresponding offsetting amount recorded within accounts payable and other liabilities on the consolidated balance sheets.

Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Servicing income, net:
 
 
 
 
 
 
 
Servicing fees and other
$
7,860

 
$
6,713

 
$
15,853

 
$
24,161

Amortization of single family MSRs(1)
(4,351
)
 
(3,422
)
 
(7,845
)
 
(12,405
)
Amortization of multifamily and SBA MSRs
(1,259
)
 
(1,104
)
 
(2,734
)
 
(2,487
)
Total
2,250

 
2,187

 
5,274

 
9,269

Risk management, single family MSRs:
 
 
 
 
 
 
 
Changes in fair value of MSRs due to assumptions (2)(3)
(2,166
)
 
(9,414
)
 
(19,010
)
 
(14,692
)
Net gain from derivative hedging
2,318

 
7,194

 
22,239

 
10,877

Total
152

 
(2,220
)
 
3,229

 
(3,815
)
Amounts attributed to discontinued operations
—

 
2,855

 
—

 
(1,531
)
Loan servicing income
$
2,402

 
$
2,822

 
$
8,503

 
$
3,923

 
(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 speeds and cash flow projections.
(3)
Includes pre-tax loss of $2.0 million and $1.3 million resulting from the sales of single family MSRs during the three and six months ended June 30, 2019, 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 June 30,
 
Six Months Ended June 30,
(rates per annum) (1)
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Constant prepayment rate ("CPR") (2)
12.64
%
 
18.03
%
 
13.76
%
 
18.81
%
Discount rate (3)
7.88
%
 
9.41
%
 
7.86
%
 
9.55
%

(1)
Weighted average rates during the period for sales of loans with similar characteristics.
(2)
Represents the expected lifetime average.
(3)
Discount rate is 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 June 30, 2020
 
 
Fair value of single family MSR
$
47,804

Expected weighted-average life (in years)
3.61

Constant prepayment rate (1)
17.73
%
Impact on fair value of 25 basis points adverse change in interest rates
$
(3,455
)
Impact on fair value of 50 basis points adverse change in interest rates
$
(6,487
)
Discount rate
8.10
%
Impact on fair value of 100 basis points increase
$
(1,541
)
Impact on fair value of 200 basis points increase
$
(2,983
)
 
(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 $14.3 billion in total unpaid principal balance of single family mortgage loans serviced for Fannie Mae, Ginnie Mae and Freddie Mac. These sales resulted in a $2.0 million and $1.3 million pre-tax loss from discontinued operations for the three and six months ended June 30, 2019.

The changes in single family MSRs measured at fair value are as follows.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
(in thousands)
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
49,933

 
$
68,250

 
$
68,109

 
$
252,168

 
Additions and amortization:
 
 
 
 
 
 
 
 
Originations
4,211

 
10,184

 
6,373

 
17,471

 
Sales
—

 
—

 
—

 
(176,944
)
 
Amortization (1)
(4,351
)
 
(3,422
)
 
(7,845
)
 
(12,405
)
 
Net additions and amortization
(140
)
 
6,762

 
(1,472
)
 
(171,878
)
 
Changes in fair value assumptions (2)
(1,989
)
 
(7,289
)
 
(18,833
)
 
(12,567
)
 
Ending balance
$
47,804

 
$
67,723

 
$
47,804

 
$
67,723

 
 
(1)
Represents changes due to collection/realization of expected cash flows and curtailments.
(2)
Principally reflects changes in model assumptions, including prepayment sped assumptions, which are primarily reflected by changes in mortgage interest rates.

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 June 30,
 
Six Months Ended June 30,
(in thousands)
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Beginning balance
$
30,120

 
$
27,692

 
$
29,494

 
$
28,328

Origination
1,648

 
530

 
3,605

 
1,160

Amortization
(1,185
)
 
(995
)
 
(2,516
)
 
(2,261
)
Ending balance
$
30,583

 
$
27,227

 
$
30,583

 
$
27,227



At June 30, 2020, the expected weighted-average remaining life of the Company's multifamily MSRs was 7.08 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.
 
(in thousands)
At June 30, 2020
 
 
Remainder of 2020
$
2,232

2021
4,382

2022
4,167

2023
3,955

2024
3,699

2025
3,363

2026 and thereafter
8,785

Total
$
30,583