Mortgage Servicing Rights

We invest in mortgage servicing rights associated with residential mortgage loans and contract with licensed sub-servicers to perform all servicing functions for these loans. The following table presents the fair value of MSRs and the aggregate principal amounts of associated loans at September 30, 2016 and December 31, 2015.

Table 9.1 – Fair Value of MSRs and Aggregate Principal Amounts of Associated Loans



	September 30, 2016				December 31, 2015
(In Thousands)	MSR Fair Value		Associated Principal		MSR Fair Value		Associated Principal
Mortgage Servicing Rights
Conforming Loans	$	69,578	$	8,422,222	$	133,838	$	12,560,533
Jumbo Loans	36,431		5,494,950		58,138		5,705,939
Total Mortgage Servicing Rights	$	106,009	$	13,917,172	$	191,976	$	18,266,472

The following table presents activity for MSRs for the three and nine months ended September 30, 2016 and 2015.

Table 9.2 – Activity for MSRs



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2016			2015			2016			2015
Balance at beginning of period	$	110,046		$	168,462		$	191,976		$	139,293
Additions	3,443			22,760			22,941			73,976
Sales	(8,860		)	—			(38,419		)	(18,206		)
Changes in fair value due to:
Changes in assumptions ⁽¹⁾	7,085			(23,786		)	(52,723		)	(18,653		)
Other changes ⁽²⁾	(5,705		)	(4,710		)	(17,766		)	(13,684		)
Balance at End of Period	$	106,009		$	162,726		$	106,009		$	162,726


(1)	Primarily reflects changes in prepayment assumptions due to changes in market interest rates.


(2)	Represents changes due to receipt of expected cash flows.

We make investments in MSRs through the retention of servicing rights associated with the residential mortgage loans that we acquire and subsequently transfer to third parties or through the direct acquisition of MSRs sold by third parties. We hold our MSR investments at our taxable REIT subsidiary. The following table details the retention and purchase of MSRs during the three and nine months ended September 30, 2016.

Table 9.3 – MSR Additions



(In Thousands)	Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
	MSR Fair Value		Associated Principal		MSR Fair Value		Associated Principal
Jumbo MSR additions:
From securitization	$	1,971	$	328,227	$	4,102	$	638,469
From loan sales	21		3,510		145		21,002
Total jumbo MSR additions	1,992		331,737		4,247		659,471
Conforming MSR additions:
From loan sales	$	—	$	—	$	3,380	$	316,290
From purchases	1,451		216,544		15,314		1,629,762
Total conforming MSR additions	1,451		216,544		18,694		1,946,052
Total MSR Additions	$	3,443	$	548,281	$	22,941	$	2,605,523

The following table presents the components of our MSR income for the three and nine months ended September 30, 2016 and 2015.

Table 9.4 – Components of MSR Income (Loss), net



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2016			2015			2016			2015
Servicing income
Income	$	9,943		$	10,028		$	32,199		$	28,199
Cost of sub-servicer	(1,217		)	(1,313		)	(4,958		)	(3,704		)
Net servicing income	8,726			8,715			27,241			24,495
Market valuation changes of MSRs	1,380			(28,496		)	(70,489		)	(32,337		)
Market valuation changes of associated derivatives ⁽¹⁾	(6,336		)	23,551			55,874			1,736
MSR provision for repurchases	—			(221		)	208			(439		)
MSR Income (Loss), Net	$	3,770		$	3,549		$	12,834		$	(6,545	)


(1)	In the second quarter of 2015, we began to identify specific derivatives used to hedge the exposure of our MSRs to changes in market interest rates. See Note 2 for additional detail.