Mortgage Banking Activities

9 Months Ended

Sep. 30, 2019

Mortgage Banking Activities [Text Block]

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 retained for investment. 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 sales commitments, which are considered derivative contracts that have not been designated as hedging instruments for accounting purposes. 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, 2019					December 31, 2018
	Unpaid Principal Balance/ Notional		Fair Value			Unpaid Principal Balance/ Notional		Fair Value
Residential mortgage loans held for sale	$	269,610	$	272,489		$	145,057	$	146,971
Residential mortgage loan commitments	379,377		10,111			160,848		5,378
Forward sales contracts	649,161		(113		)	274,000		(3,128		)
			$	282,487				$	149,221

No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of September 30, 2019 or December 31, 2018. No credit losses were recognized on residential mortgage loans held for sale for the nine month period ended September 30, 2019 and 2018.

Mortgage banking revenue was as follows (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Production revenue:
Net realized gains on sale of mortgage loans	$	8,971	$	9,063		$	24,838	$	28,699
Net change in unrealized gain on mortgage loans held for sale	97		(2,135		)	965		(2,457		)
Net change in the fair value of mortgage loan commitments	514		(2,446		)	4,733		(1,496		)
Net change in the fair value of forward sales contracts	4,232		2,768			3,015		1,871
Total production revenue	13,814		7,250			33,551		26,617
Servicing revenue	16,366		16,286			48,594		49,290
Total mortgage banking revenue	$	30,180	$	23,536		$	82,145	$	75,907

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 for accounting purposes 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 originated or 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, 2019			December 31, 2018
Number of residential mortgage loans serviced for others	128,463			132,463
Outstanding principal balance of residential mortgage loans serviced for others	$	21,046,136		$	21,658,335
Weighted average interest rate	3.99		%	3.99		%
Remaining term (in months)	290			293

The following represents activity in capitalized mortgage servicing rights (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Beginning Balance	$	208,308		$	278,719		$	259,254		$	252,867
Additions, net	9,882			8,968			24,821			28,688
Change in fair value due to principal payments	(11,936		)	(8,986		)	(27,600		)	(25,783		)
Change in fair value due to market assumption changes	(12,593		)	5,972			(62,814		)	28,901
Ending Balance	$	193,661		$	284,673		$	193,661		$	284,673

Changes in the fair value of mortgage servicing rights due to market assumption changes are included in Other operating revenue in the Consolidated Statements of Earnings. Changes in fair value due to principal payments are included in Mortgage banking costs.

Mortgage servicing rights are not traded in active markets. Fair value is determined by discounting the projected net cash flows. Significant market assumptions used to determine fair value based on significant unobservable inputs were as follows:



	September 30, 2019	December 31, 2018
Discount rate – risk-free rate plus a market premium	9.82%	9.90%
Prepayment rate - based upon loan interest rate, original term and loan type	8.31% - 17.22%	8.05% - 15.74%
Loan servicing costs – annually per loan based upon loan type:
Performing loans	$68 - $94	$67 - $93
Delinquent loans	$150 - $500	$150 - $500
Loans in foreclosure	$1,000 - $4,000	$1,000 - $4,000
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life	1.51%	2.57%
Primary/secondary mortgage rate spread	102 bps	105 bps

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.