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. 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):



	December 31, 2016				December 31, 2015
	Unpaid Principal Balance/ Notional		Fair Value		Unpaid Principal Balance/ Notional		Fair Value
Residential mortgage loans held for sale	$	286,414	$	286,971	$	293,637	$	299,505
Residential mortgage loan commitments	318,359		9,733		601,147		8,134
Forward sales contracts	569,543		5,193		884,710		800
			$	301,897			$	308,439

No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of December 31, 2016 or December 31, 2015. No credit losses were recognized on residential mortgage loans held for sale for the years ended December 31, 2016, 2015 and 2014.

Mortgage banking revenue was as follows (in thousands):



	Year Ended
	2016			2015			2014
Production revenue:
Net realized gains on sales of mortgage loans	$	68,947		$	67,407		$	56,696
Net change in unrealized gain on mortgage loans held for sale	(5,311		)	(784		)	5,357
Net change in the fair value of mortgage loan commitments	1,599			(1,837		)	7,315
Net change in the fair value of forward sales contracts	4,393			4,801			(8,307		)
Total production revenue	69,628			69,587			61,061
Servicing revenue	64,286			56,415			48,032
Total mortgage banking revenue	$	133,914		$	126,002		$	109,093

Mortgage 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

The Company generally retains the right to service residential mortgage loans sold and may purchase mortgage servicing rights. 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):



	December 31,
	2016			2015			2014
Number of residential mortgage loans serviced for others	139,340			131,859			117,483
Outstanding principal balance of residential mortgage loans serviced for others	$	21,997,568		$	19,678,226		$	16,162,887
Weighted average interest rate	3.97		%	4.12		%	4.29		%
Remaining contractual term (in months)	301			300			296

Activity in capitalized mortgage servicing rights during the three years ended December 31, 2016 is as follows (in thousands):



	Purchased			Originated			Total
Balance, December 31, 2013	$	15,935		$	137,398		$	153,333
Additions, net	—			54,413			54,413
Change in fair value due to loan runoff	(2,357		)	(16,968		)	(19,325		)
Change in fair value due to market changes	(2,464		)	(13,981		)	(16,445		)
Balance, December 31, 2014	11,114			160,862			171,976
Additions, net	—			79,546			79,546
Change in fair value due to loan runoff	(2,645		)	(25,419		)	(28,064		)
Change in fair value due to market changes	1,442			(6,295		)	(4,853		)
Balance, December 31, 2015	9,911			208,694			218,605
Additions, net	—			71,405			71,405
Change in fair value due to loan runoff	(2,844		)	(37,900		)	(40,744		)
Change in fair value due to market changes	1,842			(4,035		)	(2,193		)
Balance, December 31, 2016	$	8,909		$	238,164		$	247,073

Changes in the fair value of mortgage servicing rights due to market changes 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.

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 considered to be significant unobservable inputs were as follows:



	December 31,
	2016	2015
Discount rate – risk-free rate plus a market premium	10.08%	10.11%
Prepayment rate - based upon loan interest rate, original term and loan type	8.98%-16.91%	7.41% - 23.88%
Loan servicing costs – annually per loan based upon loan type:
Performing loans	$63 - $120	$63 - $105
Delinquent loans	$150 - $500	$150 - $500
Loans in foreclosure	$650 - $4,250	$650 - $4,250
Primary/secondary mortgage rate spread	105 bps	130 bps
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life	1.98%	1.73%

Changes in primary residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights. 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 periodically for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.

The interest rate sensitivity of our mortgage servicing rights is modeled over a range of +/- 50 basis points. At December 31, 2016, a 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights by $25 million. A 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights by $29 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 December 31, 2016 follows (in thousands):



			Past Due
	Current		30 to 59 Days		60 to 89 Days		90 Days or More		Total
FHLMC	$	7,950,818	$	52,434	$	9,812	$	25,670	$	8,038,734
FNMA	6,922,833		44,532		11,233		21,486		7,000,084
GNMA	6,304,914		181,669		56,534		22,471		6,565,588
Other	390,109		763		351		1,939		393,162
Total	$	21,568,674	$	279,398	$	77,930	$	71,566	$	21,997,568

The Company has off-balance sheet credit risk related to first lien, fixed-rate residential mortgage loans sold to U.S. government agencies with recourse prior to 2008 under various community development programs. 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. The principal balance of residential mortgage loans sold subject to recourse obligations totaled $139 million at December 31, 2016 and $155 million at December 31, 2015. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets. 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 accrual for losses on loans sold with recourse included in Other liabilities in the Consolidated Balance Sheets is summarized as follows (in thousands):



	Year Ended
	2016			2015			2014
Beginning balance	$	4,649		$	7,299		$	9,562
Provision for recourse losses	725			(982		)	354
Loans charged off, net	(1,358		)	(1,668		)	(2,617		)
Ending balance	$	4,016		$	4,649		$	7,299

The Company also has off-balance sheet 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. The Company has established an accrual for credit losses related to potential loan repurchases under representations and warranties and related servicing expenses that is included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statements of Earnings. In 2016, the Company repurchased 18 loans from the agencies for $3.9 million and paid indemnification for 7 loans. Losses on both repurchases and indemnifications were insignificant.

A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):



	December 31,
	2016		2015
Number of unresolved deficiency requests	233		198
Aggregate outstanding principal balance subject to unresolved deficiency requests	$	17,382	$	15,624
Unpaid principal balance subject to indemnification by the Company	5,803		4,365

The activity in the accruals for mortgage losses related to repurchases is summarized as follows (in thousands).



	December 31,
	2016			2015
Beginning balance	$	3,359		$	3,220
Provision for losses	27			353
Charge-offs, net	(598		)	(214		)
Ending balance	$	2,788		$	3,359