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Transfers of financial assets and mortgage servicing rights
 6 Months Ended
Jun. 30, 2012
Notes to Financial Statements [Abstract]  
Transfers And Servicing Of Financial Assets [Text Block]

Note 10 – Transfers of financial assets and mortgage servicing assets

 

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 Note 18 to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of these securitizations during the quarters and six months ended June 30, 2012 and 2011 because they did not contain any credit recourse arrangements. During the quarter ended June 30, 2012, the Corporation recorded a net gain $13.9 million (June 30, 2011 - $4.1 million) related to the residential mortgage loans securitized. During the six months ended June 30, 2012, the Corporation recorded a net gain $27.6 million (June 30, 2011 $10.4 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 during the quarters and six months ended June 30, 2012 and 2011:

  Proceeds Obtained During the Quarter Ended June 30, 2012
(In thousands)Level 1Level 2Level 3Initial Fair Value
Assets        
Trading account securities:        
Mortgage-backed securities - GNMA  -$ 204,636  -$ 204,636
Mortgage-backed securities - FNMA  -  71,450  -  71,450
Total trading account securities  -$ 276,086  -$ 276,086
Mortgage servicing rights  -  -$ 3,788$ 3,788
Total   -$ 276,086$ 3,788$ 279,874

  Proceeds Obtained During the Six Months Ended June 30, 2012
(In thousands)Level 1Level 2Level 3Initial Fair Value
Assets        
Trading account securities:        
Mortgage-backed securities - GNMA  -$ 394,815  -$ 394,815
Mortgage-backed securities - FNMA  -  130,985  -  130,985
Total trading account securities  -$ 525,800  -$ 525,800
Mortgage servicing rights  -  -$ 7,021$ 7,021
Total   -$ 525,800$ 7,021$ 532,821

  Proceeds Obtained During the Quarter Ended June 30, 2011
(In thousands)Level 1Level 2Level 3Initial Fair Value
Assets        
Trading account securities:        
Mortgage-backed securities - GNMA  -$ 217,296  -$ 217,296
Mortgage-backed securities - FNMA  -  48,229  -  48,229
Total trading account securities  -$ 265,525  -$ 265,525
Mortgage servicing rights  -  -$ 4,890$ 4,890
Total   -$ 265,525$ 4,890$ 270,415

  Proceeds Obtained During the Six Months Ended June 30, 2011
(In thousands)Level 1Level 2Level 3Initial Fair Value
Assets        
Trading account securities:        
Mortgage-backed securities - GNMA  -$ 472,870$ -$ 472,870
Mortgage-backed securities - FNMA  -  121,247  -  121,247
Total trading account securities  -$ 594,117$ -$ 594,117
Mortgage servicing rights  -  -$ 10,839$ 10,839
Total   -$ 594,117$ 10,839$ 604,956

During the six months ended June 30, 2012, the Corporation retained servicing rights on whole loan sales involving approximately $118 million in principal balance outstanding (June 30, 2011 - $53 million), with realized gains of approximately $4.6 million (June 30, 2011 - gains of $1.1 million). All loan sales performed during the six months ended June 30, 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, 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 for the six months ended June 30, 2012 and 2011.

Residential MSRs
(In thousands)June 30, 2012June 30, 2011
Fair value at beginning of period$ 151,323$ 166,907
Purchases  1,018  860
Servicing from securitizations or asset transfers  8,206  11,292
Changes due to payments on loans[1]  (8,950)  (6,577)
Reduction due to loan repurchases  (1,360)  (1,820)
Changes in fair value due to changes in valuation model inputs or assumptions  5,519  (7,852)
Other disposals  (45)  (191)
Fair value at end of period$ 155,711$ 162,619
[1] Represents the change due to collection / realization of expected cash flow over time.

Residential mortgage loans serviced for others were $17.0 billion at June 30, 2012 (December 31, 2011 - $17.3 billion; June 30, 2011 - $17.4 billion).

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, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the quarter and six months ended June 30, 2012 amounted to $11.9 million and $24.1 million, respectively (June 30, 2011 - $12.4 million and $24.8 million, respectively). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At June 30, 2012, those weighted average mortgage servicing fees were 0.28% (June 30, 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 and six months ended June 30, 2012 and 2011 were as follows:

  Quarter endedSix months ended
 June 30, 2012June 30, 2011June 30, 2012June 30, 2011
Prepayment speed 6.5% 4.9% 6.1% 4.9%
Weighted average life15.4years 20.3years16.4years 20.4years
Discount rate (annual rate) 11.5% 11.5% 11.5% 11.5%

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 assumptions were as follows as of the end of the periods reported:

 Originated MSRs
           
(In thousands)June 30, 2012December 31, 2011June 30, 2011
Fair value of servicing rights$ 104,627 $ 99,280 $ 102,427 
Weighted average life 11.9years 13.0years  11.7years
Weighted average prepayment speed (annual rate)  8.4%  7.7%  8.6%
 Impact on fair value of 10% adverse change$ (3,309) $ (2,744) $ (3,671) 
 Impact on fair value of 20% adverse change$ (6,570) $ (5,800) $ (7,113) 
Weighted average discount rate (annual rate)  12.5%  12.6%  12.6%
 Impact on fair value of 10% adverse change$ (4,513) $ (3,913) $ (4,541) 
 Impact on fair value of 20% adverse change$ (8,780) $ (7,948) $ (8,690) 

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)June 30, 2012December 31, 2011June 30, 2011
Fair value of servicing rights$ 51,084 $ 52,043 $ 60,192 
Weighted average life 12.7years 14.6years  11.7years
Weighted average prepayment speed (annual rate)  7.9%  6.9%  8.6%
 Impact on fair value of 10% adverse change$ (1,956) $ (1,887) $ (2,502) 
 Impact on fair value of 20% adverse change$ (3,435) $ (3,303) $ (4,417) 
Weighted average discount rate (annual rate)  11.4%  11.4%  11.5%
 Impact on fair value of 10% adverse change$ (2,312) $ (2,376) $ (2,789) 
 Impact on fair value of 20% adverse change$ (4,090) $ (4,214) $ (4,935) 

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 June 30, 2012, the Corporation serviced $3.2 billion (December 31, 2011 - $3.5 billion; June 30, 2011 - $3.7 billion) 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 June 30, 2012, the Corporation had recorded $180 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (December 31, 2011 - $180 million; June 30, 2011 - $156 million). 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.