Mortgage Banking Activities Mortgage Banking Activities (Notes)

12 Months Ended

Dec. 31, 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 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, 2019					December 31, 2018
	Unpaid Principal Balance/ Notional		Fair Value			Unpaid Principal Balance/ Notional		Fair Value
Residential mortgage loans held for sale	$	175,117	$	177,703		$	145,057	$	146,971
Residential mortgage loan commitments	158,460		5,233			160,848		5,378
Forward sales contracts	315,203		(665		)	274,000		(3,128		)
			$	182,271				$	149,221

No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of December 31, 2019 or December 31, 2018. No credit losses were recognized on residential mortgage loans held for sale for the years ended December 31, 2019, 2018 and 2017.

Mortgage banking revenue was as follows (in thousands):



	Year Ended
	2019			2018			2017
Production revenue:
Net realized gains on sales of mortgage loans	$	39,730		$	36,379		$	45,128
Net change in unrealized gain on mortgage loans held for sale	672			(674		)	2,031
Net change in the fair value of mortgage loan commitments	(145		)	(1,145		)	(3,210		)
Net change in the fair value of forward sales contracts	2,463			(2,870		)	(5,451		)
Total mortgage production revenue	42,720			31,690			38,498
Servicing revenue	64,821			66,097			66,221
Total mortgage banking revenue	$	107,541		$	97,787		$	104,719

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,
	2019			2018			2017
Number of residential mortgage loans serviced for others	126,828			132,463			136,528
Outstanding principal balance of residential mortgage loans serviced for others	$	20,727,106		$	21,658,335		$	22,046,632
Weighted average interest rate	3.98		%	3.99		%	3.94		%
Remaining contractual term (in months)	289			293			297

Activity in capitalized mortgage servicing rights during the three years ended December 31, 2019 is as follows (in thousands):



Balance, December 31, 2016	$	247,073
Additions, net	39,149
Change in fair value due to loan runoff	(33,527		)
Change in fair value due to market changes	172
Balance, December 31, 2017	252,867
Additions, net	35,247
Change in fair value due to loan runoff	(33,528		)
Change in fair value due to market changes	4,668
Balance, December 31, 2018	259,254
Additions, net	35,128
Change in fair value due to loan runoff	(38,979		)
Change in fair value due to market changes	(53,517		)
Balance, December 31, 2019	$	201,886

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.

Mortgage servicing rights are not traded in active markets. 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,
	2019	2018
Discount rate – risk-free rate plus a market premium	9.81%	9.90%
Prepayment rate - based upon loan interest rate, original term and loan type	8.28% - 16.05%	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
Primary/secondary mortgage rate spread	104 bps	105 bps
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life	1.73%	2.57%
Delinquency rate	2.73%	2.74%

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.