Transfers of financial assets and mortgage servicing rights

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements [Abstract]

Transfers And Servicing Of Financial Assets [Text Block]

Note 10 – Transfers of financial assets and mortgage servicing rights

The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA and FNMA securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. The securities issued through these transactions are guaranteed by the corresponding agency and, as such, under seller/service agreements the Corporation is required to service the loans in accordance with the agencies' servicing guidelines and standards. Substantially, all mortgage loans securitized by the Corporation in GNMA and FNMA securities have fixed rates and represent conforming loans. As seller, the Corporation has made certain representations and warranties with respect to the originally transferred loans and, in some instances, has sold loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Notes17 and 19 to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of the transfers occurring during the quarters ended March 31,2012 and 2011 because they did not contain any credit recourse arrangements. During the quarter ended March 31,2012,the Corporation recorded a net gain of $13.7million (March 31,2011- $6.3 million) related to the residential mortgage loans securitized.

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized.

		Proceeds Obtained During the Quarter Ended March 31, 2012
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA		-	$	190,178		-	$	190,178
Mortgage-backed securities - FNMA		-		59,535		-		59,535
Total trading account securities		-	$	249,713		-	$	249,713
Mortgage servicing rights		-		-	$	3,233	$	3,233
Total		-	$	249,713	$	3,233	$	252,946

		Proceeds Obtained During the Quarter Ended March 31, 2011
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA		-	$	255,574		-	$	255,574
Mortgage-backed securities - FNMA		-		73,018		-		73,018
Total trading account securities		-	$	328,592		-	$	328,592
Mortgage servicing rights		-		-	$	5,949	$	5,949
Total		-	$	328,592	$	5,949	$	334,541

During the quarter ended March 31,2012, the Corporation retained servicing rights on whole loan sales involving approximately $53 million in principal balance outstanding (March 31,2011- $37 million), with realized gains of approximately $1.9 million (March 31,2011 - gains of $0.9 million). All loan sales performed during the quarters ended March 31,2012 and 2011 were without credit recourse agreements.

The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations.

Classes of mortgage servicing rights were determined based on the different markets or types of assets being serviced. The Corporation recognizes the servicing rights of its banking subsidiaries that are related to residential mortgage loans as a class of servicing rights. These mortgage servicing rights (“MSRs”) are measured at fair value. Fair value determination is performed on a subsidiary basis using a discounted cash flow model with assumptions varying in accordance with the types of assets or markets served.

The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Prepayment speeds are adjusted for the Corporation's loan characteristics and portfolio behavior.

The following table presents the changes in MSRs measured using the fair value method.

Residential MSRs
(In thousands)	March 31, 2012		March 31, 2011
Fair value at beginning of period	$	151,323	$	166,907
Purchases		474		383
Servicing from securitizations or asset transfers		3,757		6,297
Changes due to payments on loans[1]		(4,161)		(3,246)
Reduction due to loan repurchases		(810)		(1,008)
Changes in fair value due to changes in valuation model inputs or assumptions		5,755		(1,917)
Other disposals		(7)		-
Fair value at end of period	$	156,331	$	167,416
[1] Represents changes due to collection / realization of expected cash flows over time.

Residential mortgage loans serviced for others were $17.2billion at March 31,2012 (December 31, 2011 - $17.3billion; March 31,2011- $18.0billion).

Net mortgage servicing fees, a component of other service fees in the consolidated statements of operations, include the changes from period to period in the fair value of the MSRs, which may result from changes in the valuation model inputs or assumptions and other changes, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the quarter ended March 31,2012amounted to $12.1 million (March 31,2011- $12.4million). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At March 31,2012, those weighted average mortgage servicing fees were 0.28% (March 31,2011 –0.26%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced.

The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased.

Key economic assumptions used in measuring the servicing rights derived from loans securitized or sold by the Corporation during the quarters ended March 31, 2012 and 2011 were as follows:

	Quarter ended
	March 31, 2012		March 31, 2011
Prepayment speed	5.6	%	4.9	%
Weighted average life	17.8	years	20.6	years
Discount rate (annual rate)	11.5	%	11.4	%

Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity to immediate changes in those assumptionswere as follows as of the end of the periods reported:

	Originated MSRs
(In thousands)		March 31, 2012			December 31, 2011			March 31, 2011
Fair value of retained interests		$	101,890		$	99,280		$	104,513
Weighted average life			12.1	years		13.0	years		12.5	years
Weighted average prepayment speed (annual rate)			8.3	%		7.7	%		8.0	%
	Impact on fair value of 10% adverse change	$	(3,129)		$	(2,744)		$	(3,441)
	Impact on fair value of 20% adverse change	$	(6,385)		$	(5,800)		$	(6,811)
Weighted average discount rate (annual rate)			12.5	%		12.6	%		12.7	%
	Impact on fair value of 10% adverse change	$	(4,142)		$	(3,913)		$	(4,582)
	Impact on fair value of 20% adverse change	$	(8,234)		$	(7,948)		$	(8,895)

The banking subsidiaries also own servicing rights purchased from other financial institutions. The fair value of purchased MSRs, their related valuation assumptions and the sensitivity to immediate changes in those assumptions were as follows as of the end of the periods reported:

	Purchased MSRs
(In thousands)		March 31, 2012			December 31, 2011			March 31, 2011
Fair value of retained interests		$	54,441		$	52,043		$	62,903
Weighted average life			13.7	years		14.6	years		12.0	years
Weighted average prepayment speed (annual rate)			7.3	%		6.9	%		8.3	%
	Impact on fair value of 10% adverse change	$	(1,958)		$	(1,887)		$	(2,577)
	Impact on fair value of 20% adverse change	$	(3,474)		$	(3,303)		$	(4,642)
Weighted average discount rate (annual rate)			11.4	%		11.4	%		11.4	%
	Impact on fair value of 10% adverse change	$	(2,405)		$	(2,376)		$	(2,821)
	Impact on fair value of 20% adverse change	$	(4,305)		$	(4,214)		$	(5,077)

The sensitivity analyses presented in the tables above for servicing rights are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation 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 the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

At March 31,2012, the Corporation serviced $3.3billion (December 31, 2011 - $3.5billion; March 31,2011- $3.8billion) in residential mortgage loans with credit recourse to the Corporation.

Under the GNMA securitizations, the Corporation, as servicer,has the right to repurchase (but not the obligation), at its option and without GNMA's prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA's specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At March 31,2012, the Corporation had recorded $173million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (December 31, 2011 - $180million; March 31,2011 - $157million).As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the Corporation.