Introduction to Mortgage Servicing Examinations Training - March 2023

Mortgage, LLC Notes to Consolidated Financial Statements (continued) (Dollars in Thousands)

During the fourth quarter of 2020, the Company sold MSRs with a fair value of $193,739 relating to certain single family mortgage loans. Based on the contract terms, the sale of those MSRs did not immediately qualify for sale accounting treatment under U.S. GAAP. The Company reported an MSRs asset (i.e., MSRs collateral for financing liability, at fair value) and MSRs liability (i.e., MSRs financing liability, at fair value) on the Consolidated Balance Sheets using a methodology consistent with the Company’s method for valuing MSRs until certain contractual provisions lapsed, which occurred during the second quarter of 2021. Therefore, at December 31, 2021, all MSRs sold by the Company qualified for sale accounting treatment under U.S. GAAP. The following is a summary of the weighted average discount rate and prepayment speed assumptions used to determine the fair value of MSRs as well as the expected life of the loans in the servicing portfolio:

December 31, 2021 December 31, 2020

Discount rate ............................................................................................ Prepayment speeds .................................................................................. Life (in years) ..........................................................................................

9.5 % 8.7 %

9.9 %

15.8 %

7.25

5.05

The key assumptions used to estimate the fair value of MSRs are prepayment speeds and the discount rate. Increases in prepayment speeds generally have an adverse effect on the value of MSRs as the underlying loans prepay faster. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase and therefore, the estimated life of the MSRs and related cash flows decrease. Decreases in prepayment speeds generally have a positive effect on the value of MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease and therefore, the estimated life of the MSRs and related cash flows increase. Increases in the discount rate result in a lower MSRs value and decreases in the discount rate result in a higher MSRs value. MSRs uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties.

The following table stresses the discount rate and prepayment speeds at two different data points:

Discount Rate

Prepayment Speeds

100 BPS Adverse Change

200 BPS Adverse Change

10% Adverse Change

20% Adverse Change

December 31, 2021 Mortgage servicing rights ....................................$ (232,658) $ (435,181) $ (198,153) $ (372,018) December 31, 2020 Mortgage servicing rights .......................................$ (115,130) $ (212,119) $ (147,420) $ (279,691)

4. Mortgage Loans Held for Sale

The Company sells substantially all of its originated mortgage loans into the secondary market. The Company may retain the right to service some of these loans upon sale through ownership of servicing rights. A reconciliation of the changes in mortgage loans held for sale to the amounts presented on the Consolidated Statements of Cash Flows is below:

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