Transfers of financial assets and mortgage servicing assets

12 Months Ended

Dec. 31, 2016

Transfers and Servicing of Financial Assets

Transfers Of Financial Assets And Mortgage Servicing Assets

Note 14 – 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. As seller, the Corporation has made certain representations and warranties with respect to the originally transferred loans and, in the past, has sold certain loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Note 27 to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of these securitizations during the years ended December 31, 2016 and 2015 because they did not contain any credit recourse arrangements. The Corporation recorded a net gain of $24.6 million and $32.6 million, respectively, during the years ended December 31, 2016 and 2015 related to the residential mortgage loan securitized.

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized during the years ended December 31, 2016 and 2015:

		Proceeds obtained during the year ended December 31, 2016
(In thousands)	Level 1		Level 2		Level 3		Initial fair value
Assets
Investments securities available for sale:
Mortgage-backed securities - GNMA	$	-	$	41,466	$	-	$	41,466
Mortgage-backed securities - FNMA		-		18,605		-		18,605
Total investment securities available-for-sale	$	-	$	60,071	$	-	$	60,071
Trading account securities:
Mortgage-backed securities - GNMA	$	-	$	571,602	$	-	$	571,602
Mortgage-backed securities - FNMA		-		143,939		-		143,939
Total trading account securities	$	-	$	715,541	$	-	$	715,541
Mortgage servicing rights	$	-	$	-	$	9,889	$	9,889
Total	$	-	$	775,612	$	9,889	$	785,501

		Proceeds obtained during the year ended December 31, 2015
(In thousands)	Level 1		Level 2		Level 3		Initial fair value
Assets
Trading account securities:
Mortgage-backed securities - GNMA	$	-	$	869,210	$	-	$	869,210
Mortgage-backed securities - FNMA		-		218,911		-		218,911
Total trading account securities	$	-	$	1,088,121	$	-	$	1,088,121
Mortgage servicing rights	$	-	$	-	$	12,549	$	12,549
Total	$	-	$	1,088,121	$	12,549	$	1,100,670

During the year ended December 31, 2016, the Corporation retained servicing rights on whole loan sales involving approximately $70 million in principal balance outstanding (2015 - $69 million), with net realized gains of approximately $2.3 million (2015 - $2.7 million). All loan sales performed during the years ended December 31, 2016 and 2015 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. These mortgage servicing rights (“MSR”) are measured at fair value.

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 years ended December 31, 2016 and 2015.

Residential MSRs
(In thousands)	December 31, 2016		December 31, 2015
Fair value at beginning of period	$	211,405	$	148,694
Additions		10,835		76,060
Changes due to payments on loans^[1]		(17,482)		(17,539)
Reduction due to loan repurchases		(3,109)		(1,897)
Changes in fair value due to changes in valuation model inputs or assumptions		(4,745)		6,087
Other disposals		(15)		-
Fair value at end of period	$	196,889	$	211,405
[1] Represents the change due to collection / realization of expected cash flow over time.

Additions to mortgage servicing rights for the year ended December 31, 2015 include those acquired as part of the Doral Bank Transaction and those assumed for a portfolio previously serviced by Doral Bank in connection with a pre-existing backup servicing agreement.

Residential mortgage loans serviced for others were $18.0 billion at December 31, 2016 (2015 - $20.6 billion).

Net mortgage servicing fees, a component of mortgage banking activities 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. The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At December 31, 2016, those weighted average mortgage servicing fees were 0.30% (2015 – 0.28%). 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 years ended December 31, 2016 and 2015 were as follows:

	Years ended
	December 31, 2016		December 31, 2015
Prepayment speed	5.2	%	8.6	%
Weighted average life (in years)	10.2		7.1
Discount rate (annual rate)	11.0	%	11.1	%

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 servicing rights purchased from other financial institutions, and the sensitivity to immediate changes in those assumptions, were as follows as of the end of the periods reported:

		Originated MSRs						Purchased MSRs
		December 31,						December 31,
(In thousands)		2016			2015			2016			2015
Fair value of servicing rights		$	88,056		$	98,648		$	108,833		$	112,757
Weighted average life (in years)			7.8			7.3			6.9			6.2
Weighted average prepayment speed (annual rate)			4.6	%		6.0	%		4.8	%		6.9	%
	Impact on fair value of 10% adverse change	$	(1,668)		$	(2,488)		$	(2,051)		$	(2,871)
	Impact on fair value of 20% adverse change	$	(3,590)		$	(5,241)		$	(4,400)		$	(6,034)
Weighted average discount rate (annual rate)			11.5	%		11.5	%		11.0	%		11.0	%
	Impact on fair value of 10% adverse change	$	(3,851)		$	(4,083)		$	(4,369)		$	(4,211)
	Impact on fair value of 20% adverse change	$	(7,699)		$	(8,206)		$	(8,778)		$	(8,525)

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 December 31, 2016, the Corporation serviced $1.7 billion (2015 - $1.9 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 December 31, 2016, the Corporation had recorded $49 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (2015 - $140 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. During the year ended December 31, 2016, the Corporation repurchased approximately $224 million of mortgage loans under the GNMA buy-back option program (2015 - $80 million). The determination to repurchase these loans was based on the economic benefits of the transaction, which results in a reduction of the servicing costs for these severely delinquent loans, mostly related to principal and interest advances. Furthermore, due to their guaranteed nature, the risk associated with the loans is minimal. The Corporation places these loans under its loss mitigation programs and once brought back to current status, these may be either retained in portfolio or re-sold in the secondary market.

Quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together with them by the Corporation, including its own loan portfolio, for the years ended December 31, 2016 and 2015, are disclosed in the following tables. Loans securitized/sold represent loans in which the Corporation has continuing involvement in the form of credit recourse.

2016
(In thousands)		Total principal amount of loans, net of unearned		Principal amount 60 days or more past due		Net credit losses (recoveries)
Loans (owned and managed):
Commercial	$	10,798,507	$	314,339	$	13,073
Construction		776,300		1,668		(2,935)
Legacy		45,293		3,683		(1,913)
Lease financing		702,893		4,418		3,888
Mortgage		8,448,883		1,074,252		68,530
Consumer		3,754,393		104,895		85,398
Covered loans		572,878		84,079		2,716
Less:
Loans securitized / sold		1,663,701		119,458		2,281
Loans held-for-sale		88,821		-		(5,445)
Loans held-in-portfolio	$	23,346,625	$	1,467,876	$	171,921

2015
(In thousands)		Total principal amount of loans, net of unearned		Principal amount 60 days or more past due		Net credit losses (recoveries)
Loans (owned and managed):
Commercial	$	10,144,237	$	411,291	$	107,955
Construction		681,201		14,086		(886)
Legacy		64,436		4,311		(2,760)
Lease financing		627,650		4,639		3,303
Mortgage		9,011,473		1,188,290		47,552
Consumer		3,837,679		106,194		92,926
Covered loans		646,115		101,451		58,880
Less:
Loans securitized / sold		1,883,561		144,568		811
Loans held-for-sale		137,000		45,719		37,602
Loans held-in-portfolio	$	22,992,230	$	1,639,975	$	268,557

- Definition

The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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