Mortgage Banking Activities

3 Months Ended

Mar. 31, 2020

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):



	March 31, 2020					December 31, 2019
	Unpaid Principal Balance/ Notional		Fair Value			Unpaid Principal Balance/ Notional		Fair Value
Residential mortgage loans held for sale	$	185,713	$	191,860		$	175,117	$	177,703
Residential mortgage loan commitments	657,570		24,250			158,460		5,233
Forward sales contracts	750,719		(11,390		)	315,203		(665		)
			$	204,720				$	182,271

No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of March 31, 2020 or December 31, 2019. No credit losses were recognized on residential mortgage loans held for sale for the three month period ended March 31, 2020 and 2019.

Mortgage banking revenue was as follows (in thousands):



	Three Months Ended March 31,
	2020			2019
Production revenue:
Net realized gains on sale of mortgage loans	$	9,717		$	5,693
Net change in unrealized gain on mortgage loans held for sale	3,561			(53		)
Net change in the fair value of mortgage loan commitments	19,017			2,713
Net change in the fair value of forward sales contracts	(10,725		)	(485		)
Total production revenue	21,570			7,868
Servicing revenue	15,597			15,966
Total mortgage banking revenue	$	37,167		$	23,834

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):



	March 31, 2020			December 31, 2019
Number of residential mortgage loans serviced for others	124,819			126,828
Outstanding principal balance of residential mortgage loans serviced for others	$	20,261,526		$	20,727,106
Weighted average interest rate	3.96		%	3.98		%
Remaining term (in months)	287			289

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



	Three Months Ended March 31,
	2020			2019
Beginning Balance	$	201,886		$	259,254
Additions, net	5,441			6,188
Change in fair value due to principal payments	(8,019		)	(6,583		)
Change in fair value due to market assumption changes	(88,480		)	(20,666		)
Ending Balance	$	110,828		$	238,193

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:



	March 31, 2020	December 31, 2019
Discount rate – risk-free rate plus a market premium	9.80%	9.81%
Prepayment rate - based upon loan interest rate, original term and loan type	8.22% - 32.80%	8.28% - 16.05%
Loan servicing costs – annually per loan based upon loan type:
Performing loans	$69 - $94	$68 - $94
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	0.53%	1.73%
Primary/secondary mortgage rate spread	105 bps	104 bps
Delinquency rate	2.55%	2.73%

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.