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Mortgage Banking Activities
 9 Months Ended
Sep. 30, 2014
Mortgage Banking [Abstract]  
Mortgage Banking Activities [Text Block]
(6) Mortgage Banking Activities

Residential Mortgage Loan Production

The Company originates, markets and services conventional and government-sponsored residential mortgage loans. Generally, conforming fixed rate residential mortgage loans are held for sale in the secondary market and non-conforming and adjustable-rate residential mortgage loans are held for investment. All residential mortgage loans originated for sale by the Company are carried at fair value based on sales commitments and market quotes. Changes in the fair value of mortgage loans held for sale are included in Other operating revenue – Mortgage banking revenue. Residential mortgage loans held for sale also includes the fair value of residential mortgage loan commitments and forward sale commitments which are considered derivative contracts that have not been designated as hedging instruments. The volume of mortgage loans originated for sale and secondary market prices are the primary drivers of originating and marketing revenue.

Residential mortgage loan commitments are generally outstanding for 60 to 90 days, which represents the typical period from commitment to originate a residential mortgage loan to when the closed loan is sold to an investor. Residential mortgage loan commitments are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days.

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loan commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):
 
 
September 30, 2014
 
December 31, 2013
 
September 30, 2013
 
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid Principal Balance/
Notional
 
Fair Value
 
Unpaid
Principal
 Balance/
Notional
 
Fair Value
Residential mortgage loans held for sale
 
$
360,126

 
$
366,183

 
$
192,266

 
$
193,584

 
$
220,800

 
$
228,926

Residential mortgage loan commitments
 
537,975

 
8,480

 
258,873

 
2,656

 
351,196

 
10,948

Forward sales contracts
 
790,131

 
(1,410
)
 
435,867

 
4,306

 
560,069

 
(9,363
)
 
 
 

 
$
373,253

 
 

 
$
200,546

 
 

 
$
230,511



No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of September 30, 2014, December 31, 2013 or September 30, 2013. No credit losses were recognized on residential mortgage loans held for sale for the nine month periods ended September 30, 2014 and 2013.

Mortgage banking revenue was as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Production revenue:
 
 
 
 
 
 
 
 
Net realized gains on sale of mortgage loans
 
$
17,100

 
$
19,440

 
$
39,025

 
$
83,147

Net change in unrealized gain on mortgage loans held for sale
 
(3,110
)
 
11,618

 
4,739

 
(4,091
)
Change in the fair value of mortgage loan commitments
 
(5,136
)
 
12,657

 
5,824

 
(1,785
)
Change in the fair value of forward sales contracts
 
5,839

 
(31,167
)
 
(5,716
)
 
(8,457
)
Total production revenue
 
14,693

 
12,548

 
43,872

 
68,814

Servicing revenue
 
12,121

 
10,938

 
35,116

 
31,244

Total mortgage banking revenue
 
$
26,814

 
$
23,486

 
$
78,988

 
$
100,058



Production revenue includes gain (loss) on residential mortgage loans held for sale and changes in the fair value of derivative contracts not designated as hedging instruments related to residential mortgage loan commitments and forward sales contracts. Servicing revenue includes servicing fee income and late charges on loans serviced for others.

Residential Mortgage Servicing

Mortgage servicing rights may be recognized when mortgage loans are originated pursuant to an existing plan for sale or, if no such plan exists, when the mortgage loans are sold. Mortgage servicing rights may also be purchased. Both originated and purchased mortgage servicing rights are initially recognized at fair value. The Company has elected to carry all mortgage servicing rights at fair value. Changes in the fair value are recognized in earnings as they occur. The unpaid principal balance of loans serviced for others is the primary driver of servicing revenue.

The following represents a summary of mortgage servicing rights (Dollars in thousands):
 
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
Number of residential mortgage loans serviced for others
 
114,493

 
106,137

 
104,115

Outstanding principal balance of residential mortgage loans serviced for others
 
$
15,499,653

 
$
13,718,942

 
$
13,298,479

Weighted average interest rate
 
4.33
%
 
4.40
%
 
4.42
%
Remaining term (in months)
 
295

 
292

 
292



Activity in capitalized mortgage servicing rights during the three months ended September 30, 2014 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, June 30, 2014
 
$
13,082

 
$
142,658

 
$
155,740

Additions, net
 
—

 
17,367

 
17,367

Change in fair value due to loan runoff
 
(624
)
 
(4,478
)
 
(5,102
)
Change in fair value due to market changes
 
821

 
4,460

 
5,281

Balance, Sept. 30, 2014
 
$
13,279

 
$
160,007

 
$
173,286


Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2014 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, December 31, 2013
 
$
15,935

 
$
137,398

 
$
153,333

Additions, net
 
—

 
39,183

 
39,183

Change in fair value due to loan runoff
 
(1,737
)
 
(11,869
)
 
(13,606
)
Change in fair value due to market changes
 
(919
)
 
(4,705
)
 
(5,624
)
Balance, Sept. 30, 2014
 
$
13,279

 
$
160,007

 
$
173,286


Activity in capitalized mortgage servicing rights during the three months ended September 30, 2013 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, June 30, 2013
 
$
15,582

 
$
117,307

 
$
132,889

Additions, net
 
—

 
13,225

 
13,225

Change in fair value due to loan runoff
 
(693
)
 
(4,212
)
 
(4,905
)
Change in fair value due to market changes
 
(76
)
 
(270
)
 
(346
)
Balance, Sept. 30, 2013
 
$
14,813

 
$
126,050

 
$
140,863


Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2013 was as follows (in thousands):
 
 
Purchased
 
Originated
 
Total
Balance, December 31, 2012
 
$
12,976

 
$
87,836

 
$
100,812

Additions, net
 
—

 
39,157

 
39,157

Change in fair value due to loan runoff
 
(2,504
)
 
(13,229
)
 
(15,733
)
Change in fair value due to market changes
 
4,341

 
12,286

 
16,627

Balance, Sept. 30, 2013
 
$
14,813

 
$
126,050

 
$
140,863



Changes in the fair value of mortgage servicing rights are included in Other operating revenue in the Consolidated Statements of Earnings. Changes in fair value due to loan runoff are included in Mortgage banking costs. Changes in fair value due to market changes are reported separately. Changes in fair value due to market changes during the period relate to assets held at the reporting date.

There is no active market for trading in mortgage servicing rights after origination. Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value based on significant unobservable inputs were as follows:

 
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
Discount rate – risk-free rate plus a market premium
 
10.17%
 
10.21%
 
10.23%
Loan servicing costs – annually per loan based upon loan type:
 
 
 
 
 
 
    Performing loans
 
$60-$105
 
$60 - $105
 
$58 - $105
    Delinquent loans
 
$150 - $500
 
$150 - $500
 
$135 - $500
    Loans in foreclosure
 
$1,000 - $4,250
 
$1,000 - $4,250
 
$875 - $4,250
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life
 
1.95%
 
1.80%
 
1.54%


The Company is exposed to interest rate risk as benchmark residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights, which is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated daily for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.

Stratification of the residential mortgage loan servicing portfolio and outstanding principal of loans serviced for others by interest rate at September 30, 2014 follows (in thousands):
 
 
< 4.00%
 
4.00% - 4.99%

 
5.00% - 5.99%

 
> 5.99%
 
Total
Fair value
 
$
66,895

 
$
77,537

 
$
23,011

 
$
5,843

 
$
173,286

Outstanding principal of loans serviced for others
 
$
5,988,358

 
$
6,410,710

 
$
2,090,157

 
$
1,010,428

 
$
15,499,653

Weighted average prepayment rate1
 
7.10
%
 
8.06
%
 
11.63
%
 
26.41
%
 
9.37
%
1 
Annual prepayment estimates based upon loan interest rate, original term and loan type. Weighted average prepayment rate is determined by weighting the prepayment speed for each loan by its unpaid principal balance.

The interest rate sensitivity of our mortgage servicing rights and securities and derivative contracts held as an economic hedge is modeled over a range of +/- 50 basis points. At September 30, 2014, a 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights, net of economic hedge by $3.2 million. A 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights, net of economic hedge by $5.4 million. In the model, changes in the value of servicing rights due to changes in interest rates assume stable relationships between residential mortgage rates and prepayment speeds. Changes in market conditions can cause variations from these assumptions. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations.

The aging status of our mortgage loans serviced for others by investor at September 30, 2014 follows (in thousands):
 
 
 
 
Past Due
 
 
 
 
Current
 
30 to 59
Days
 
60 to 89
Days
 
90 Days or More
 
Total
FHLMC
 
$
4,952,266

 
$
37,051

 
$
12,343

 
$
31,874

 
$
5,033,534

FNMA
 
4,957,520

 
29,596

 
8,963

 
18,070

 
5,014,149

GNMA
 
4,748,226

 
128,785

 
41,634

 
14,096

 
4,932,741

Other
 
505,623

 
5,473

 
2,555

 
5,578

 
519,229

Total
 
$
15,163,635

 
$
200,905

 
$
65,495

 
$
69,618

 
$
15,499,653


The Company has off-balance sheet credit risk related to residential mortgage loans sold to U.S. government agencies with recourse prior to 2008 under various community development programs. These loans consist of first lien, fixed-rate residential mortgage loans underwritten to standards approved by the agencies including full documentation and originated under programs available only for owner-occupied properties. However, these loans have a higher risk of delinquency and loss given default than traditional residential mortgage loans. The Company no longer sells residential mortgage loans with recourse other than obligations under standard representations and warranties. The recourse obligation relates to loan performance for the life of the loan and the Company is obligated to repurchase the loan at the time of foreclosure for the unpaid principal balance plus unpaid interest. The principal balance of residential mortgage loans sold subject to recourse obligations totaled $175 million at September 30, 2014, $191 million at December 31, 2013 and $198 million at September 30, 2013. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets totaling $8.3 million at September 30, 2014, $10 million at December 31, 2013 and $10 million at September 30, 2013. At September 30, 2014, approximately 3% of the loans sold with recourse with an outstanding principal balance of $5.8 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 5% with an outstanding balance of $9.1 million were past due 30 to 89 days. The provision for credit losses on loans sold with recourse is included in Mortgage banking costs in the Consolidated Statements of Earnings.

The activity in the allowance for losses on loans sold with recourse included in Other liabilities in the Consolidated Balance Sheets is summarized as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
8,690

 
$
10,920

 
$
9,562

 
$
13,158

Provision for recourse losses
93

 
576

 
260

 
228

Loans charged off, net
(461
)
 
(1,055
)
 
(1,500
)
 
(2,945
)
Ending balance
$
8,322

 
$
10,441

 
$
8,322

 
$
10,441



The Company also has obligations to repurchase or provide indemnification for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements and to service loans in accordance with investor guidelines. The Company has established accruals for losses related to these obligations that are included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statements of Earnings. 

The level of repurchases and indemnifications related to standard representations and warranties has remained low. The Company repurchased nine loans from the agencies for $2.0 million during the third quarter of 2014. There were no indemnifications on loans paid during the third quarter of 2014. Losses recognized on indemnifications and repurchases were insignificant.



A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):
 
September 30,
2014
 
September 30,
2013
Number of unresolved deficiency requests
184

 
524

Aggregate outstanding principal balance subject to unresolved deficiency requests
$
15,548

 
$
64,428

Unpaid principal balance subject to indemnification by the Company
4,792

 
2,440



The activity in the accruals for mortgage losses is summarized as follows (in thousands).
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
12,119

 
$
9,508

 
$
12,716

 
$
8,983

Provision for losses
1,122

 
1,804

 
2,475

 
4,111

Charge-offs, net
(3,486
)
 
(222
)
 
(5,436
)
 
(2,004
)
Ending balance
$
9,755


$
11,090


$
9,755


$
11,090