Loan Sales And Securitizations

6 Months Ended

Jun. 30, 2013

Loan Sales And Securitizations [Abstract]

Loan Sales And Securitizations

Note 13 – Loan Sales and Securitizations

Prior to 2009, FHN utilized loan sales and securitizations as a significant source of liquidity for its mortgage banking operations. FHN no longer retains financial interests in loans it transfers to third parties.During first and second quarters 2013 and 2012, loan sale activity was not material.

Retained Interests

Interests retained from prior loan sales, including GSE securitizations, typically included MSR, excess interest (structured as interest-only ("IO") strips), and principal-only ("PO") strips. Excess interest represents rights to receive interest from serviced assets that exceed contractually specified rates. PO strips are principal cash flow tranches. MSR were initially valued at fair value and the remaining retained interests were initially valued by allocating the remaining cost basis of the loan between the security or loan sold and the remaining retained interests based on their relative fair values at the time of sale or securitization.

In certain cases, FHN continues to service and receive servicing fees related to the transferred loans. During second quarter 2013 and 2012, FHN received annual servicing fees approximating .29percent of the outstanding balance of underlying single-family residential mortgage loans and .34percent inclusive of income related to excess interest. In second quarters2013 and 2012, FHN received annual servicing fees approximating .50percent of the outstanding balance of underlying loans for HELOC and home equity loans transferred. MSR related to loans transferred and serviced by FHN, as well as MSR related to loans serviced by FHN and transferred by others, are discussed further in Note 5 -Mortgage Servicing Rights. There were no additions to MSR in 2013 or 2012.

The sensitivity of the fair value of all retained or purchased MSR to immediate 10 percent and 20 percent adverse changes in assumptions on June 30, 2013 and 2012, are as follows:
		June 30, 2013									June 30, 2012
(Dollars in thousands except for annual cost to service)			First Liens		Second Liens				HELOC			First Liens		Second Liens			HELOC
Fair value of retained interests		$	111,076		$	172		$	2,605		$	126,085		$	215		$	2,991
Weighted average life (in years)			4.3			3.4			3.3			3.9			2.9			2.8
Annual prepayment rate			19.1	%		30.4	%		30.3	%		21.4	%		26.0	%		26.6	%
	Impact on fair value of 10% adverse change	$	(5,008)		$	(11)		$	(139)		$	(6,698)		$	(14)		$	(179)
	Impact on fair value of 20% adverse change		(9,593)			(21)			(268)			(12,792)			(26)			(344)
Annual discount rate on servicing cash flows			11.7	%		14.0	%		18.0	%		11.8	%		14.0	%		18.0	%
	Impact on fair value of 10% adverse change	$	(3,198)		$	(5)		$	(80)		$	(3,486)		$	(6)		$	(93)
	Impact on fair value of 20% adverse change		(6,200)			(9)			(155)			(6,765)			(11)			(181)
Annual cost to service (per loan) (a)		$	118		$	50		$	50		$	116		$	50		$	50
	Impact on fair value of 10% adverse change		(2,530)			(4)			(40)			(3,014)			(5)			(46)
	Impact on fair value of 20% adverse change		(5,043)			(8)			(81)			(6,007)			(10)			(91)
Annual earnings on escrow			1.4	%		-			-			1.4	%		-			-
	Impact on fair value of 10% adverse change	$	(1,064)			-			-		$	(824)			-			-
	Impact on fair value of 20% adverse change		(2,128)			-			-			(1,648)			-			-

• Amounts represent market participant based assumptions.

The sensitivity of the fair value of other retained interests to immediate 10 percent and 20 percent adverse changes in assumptions on June 30, 2013 and 2012, are as follows:
		June 30, 2013						June 30, 2012
		Excess						Excess
		Interest			Certificated			Interest			Certificated
(Dollars in thousands)		IO			PO (a)			IO			PO
Fair value of retained interests		$	10,608		$	5,264		$	14,669		$	5,667
Weighted average life (in years)			4.3			3.6			3.9			2.6
Annual prepayment rate			17.2	%		17.4	%		19.2	%		32.0	%
	Impact on fair value of 10% adverse change	$	(444)		$	(219)		$	(678)		$	(321)
	Impact on fair value of 20% adverse change		(857)			(458)			(1,304)			(673)
Annual discount rate on residual cash flows			13.1	%		NM			13.3	%		82.2	%
	Impact on fair value of 10% adverse change	$	(394)			NM		$	(548)		$	(253)
	Impact on fair value of 20% adverse change		(757)			NM			(1,053)			(482)

NM - Not meaningful

(a)       In the second half of 2012, FHN changed the method used to estimate the fair value for certified PO due to more limited market information for these securities.

These sensitivities are hypothetical and should not be considered predictive of future performance. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions cannot necessarily be extrapolated because the relationship between the change in assumption and the change in fair value may not be linear. Also, the effect on the fair value of the retained interest caused by a particular assumption variation is calculated independently from all other assumption changes. In reality, changes in one factor may result in changes in another, which might magnify or mitigate the sensitivities. Furthermore, the estimated fair values, as disclosed, should not be considered indicative of future earnings on these assets.

Prepayment rates and credit spreads (part of the discount rate) are significant unobservable inputs used in the fair value measurement of FHN's MSR, principal only strips and excess interest IO. Cost to service and earnings on escrow are additional unobservable inputs included in the valuation of MSR. Increases in prepayment rates, credit spreads and costs to service in isolation would result in significantly lower fair value measurements for the associated assets. Conversely, decreases in prepayment rates, credit spreads and costs to service in isolation would result in significantly higher fair value measurements for the associated assets. An increase/(decrease) in earnings on escrow in isolation would be accompanied by an increase /(decrease) in the value of the related MSR. Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayment rates as customers are expected to refinance existing mortgages under more favorable interest rate terms. Generally, changes in discount rates directionally mirror the changes in market interest rates.

The MSR Hedging Working Group reviews the overall assessment of the estimated fair value of MSR and excess interests weekly and is responsible for approving the critical assumptions used by management to determine the estimated fair value of FHN's retained interests. In addition, this working group reviews the source of significant changes to the carrying values each quarter and is responsible for current hedges and approving hedging strategies.

FHN also engages in a process referred to as “price discovery” on a quarterly basis to assess the reasonableness of the estimated fair value of retained interests. Price discovery is conducted through a process of obtaining the following information: (1) quarterly informal (and an annual formal) valuation of the servicing portfolio by prominent independent mortgage-servicing brokers and (2) a collection of surveys and benchmarking data made available by independent third parties that include peer participants in the mortgage banking business. Although there is no single source of market information that can be relied upon to assess the fair value of MSR or excess interests, FHN reviews all information obtained during price discovery to determine whether the estimated fair value of MSR is reasonable when compared to market information. FHN determined that the MSR and excess interests valuations and assumptions in second quarters2013 and 2012 were reasonable based on the price discovery process.

For the three and six months ended June 30, 2013 and 2012, cash flows received and paid related to loan sales and securitizations were as follows:
	Three Months Ended				Six Months Ended
	June 30				June 30
(Dollars in thousands)	2013		2012		2013		2012
Proceeds from initial sales	$	-	$	46,452	$	10,843	$	100,748
Servicing fees retained (a)		12,692		15,494		25,281		33,226
Purchases of GNMA guaranteed mortgages		31,814		27,684		70,855		62,715
Purchases of previously transferred financial assets (b) (c)		79,613		75,118		224,350		141,918
Other cash flows received on retained interests		1,415		3,554		2,828		5,219

• Includes servicing fees on MSR associated with loan sales and purchased MSR.
• Includes repurchases of delinquent and performing loans, foreclosed assets, and make-whole payments for economic losses incurred by purchaser. Also includes buyouts from GSEs in order to facilitate foreclosures.
• Six months ended June 30, 2013, includes $74.7 million of cash paid related to clean-up calls exercised by FHN.

The principal amount of loans transferred through loan sales and securitizations and other loans managed with them, the principal amount of delinquent loans, and the net credit losses during the three and six months ended June 30, 2013 and 2012, are as follows:
	Principal Amount of Residential Real
	Estate Loans (a) (b) (c)				Net Credit Losses (c)
	June 30				Three Months Ended June 30					Six Months Ended June 30
(Dollars in thousands)	2013		2012		2013		2012			2013	2012
Total loans managed or transferred	$	13,691,924	$	16,616,012	$	78,055	$	112,398	$	140,682	$	228,884

• Amounts represent real estate residential loans in FHN's portfolio, held-for-sale, and loans that have been transferred in proprietary securitizations and whole loan sales in which FHN has a retained interest other than servicing rights. Also includes $4.8billion and $6.9billion of loans transferred to GSEs with any type of retained interest on June 30, 2013 and 2012, respectively.
• On June 30, 2013 and 2012, includes$.7 billionwhere the principal amount is 90 days or more past due or nonaccrual. Included in these amounts are $38.1million and $38.8million of GNMA guaranteed mortgages on June30, 2013 and 2012, respectively.
• No delinquency or net credit loss data is provided for the loans transferred to FNMA or FHLMC because these agencies retain credit risk. See Note 10 - Contingencies and Other Disclosures for discussion related to repurchase obligations for loans transferred to GSEs or private investors.