FFIEC CAPITAL MARKETS CONFERENCE€¦ · FFIEC CAPITAL MARKETS CONFERENCE Mortgage Pipeline Risk Management and Evaluating & Valuing Mortgage Servicing Rights Eric Nokken, Director

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MORTGAGE BANKING DERIVATIVES &MORTGAGE SERVICING RIGHTS

FFIEC CAPITAL MARKETS CONFERENCEMortgage Pipeline Risk Management and

Evaluating & Valuing Mortgage Servicing Rights

Eric Nokken, Director

Wilary Winn LLC

August 1, 2018

FFIEC INTERNAL USE

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TODAY’S SPEAKER

Director

Mr. Nokken has over twenty years of experience in the financial services industry and has been with Wilary Winn since 2004.

Eric leads Wilary Winn’s mortgage banking activities line of business. His team provides mortgage servicing rights valuations on portfolios that range in size from $4 million to over$4 billion for more than 250 clients across the country.

Eric is an expert in the accounting and regulatory reporting related to mortgage banking activities, including interest rate lock commitment and forward loan sale commitment derivatives, as well as mortgage servicing rights.

ERIC NOKKEN

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• Mortgage banking derivatives

• Accounting and regulatory reporting for mortgage banking derivatives

• Valuation of retained servicing

• Accounting and regulatory reporting for retained servicing

TOPICS COVERED

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• Interagency advisory on mortgage banking – February 2003

• Interagency advisory on accounting and reporting for commitments to originate and sell mortgage loans – May 2005

• OCC Comptroller’s Handbook Mortgage Banking February 2014

GUIDANCE

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MORTGAGE BANKING DERIVATIVES

• Issued May 3, 2005

• Provides guidance on accounting and reporting for commitments to:

o Originate mortgage loans that will be held for resale; and

o Sell mortgage loans under mandatory and best efforts sales contracts

INTERAGENCY ADVISORY ON ACCOUNTING AND REPORTING FOR COMMITMENTS TO ORIGINATE AND SELL MORTGAGE LOANS

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• Reporting the value of derivative loan sales agreements as assets, when in fact they were liabilities, and vice-versa

• Failing to report the derivatives and their changes in fair value on the balance sheet and income statement

NONCOMPLIANCE ISSUES NOTED IN THE ADVISORY

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• Interest rate lock in commitments on mortgage loans that will be held for resale are derivatives

• Commitments to originate mortgage loans to be held for investment and other types of loans are generally not derivatives

INTEREST RATE LOCK COMMITMENTS (IRLCs)

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• Lock ins for fixed rate loans

• Lock ins for adjustable-rate loans

• Commitments with floating rates

TYPES OF MORTGAGE LOAN IRLCs

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• Loan amount

• Interest rate

• Price of the loan at valuation date

• Value of servicing

• Discount points

• Direct origination fees and costs

SECONDARY MARKET VALUE COMPONENTS

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• IRLCs should be initially recorded at fair value

• Subsequent changes in fair value are to be measured and reported on the balance sheet and income statement

IRLC VALUE

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• Loan Amount $250,000

• Price to the borrower at lock-in: Par or 100

• Locked Interest Rate 4.500%

• Market Interest Rate 4.125%

• Sales Price (locked with investor) 101.50

• Value of Servicing 1.000% or $2,500

• Projected Origination Costs 1.000% or $2,500

VALUE OF IRLC – EXAMPLE

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VALUE OF IRLC – EXAMPLE Rates Loan Rates Loan Loan

Increase Has Been Drop Has Been atInception 50 bp Processed 100 bp Approved Close

Loan Amount (A) 250,000$ 250,000$ 250,000$ 250,000$ 250,000$ 250,000$

Lock In Interest Rate 4.500% 4.500% 4.500% 4.500% 4.500% 4.500%

Market Interest Rate 4.125% 4.625% 4.625% 3.625% 3.625% 3.625%

Market Value (B) 101.50% 99.50% 99.50% 103.50% 103.50% 103.50%

Servicing Value (C) 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%

Origination Costs (D) 1.00% 1.00% 0.50% 0.50% 0.25% 0.00%

Borrower Price (E) 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Value as a Percent of Loan (F) 1.50% -0.50% 0.00% 4.00% 4.25% 4.50% (B) + (C) - (D) - (E)

Dollar Value (A) * (F) (G) 3,750$ (1,250)$ -$ 10,000$ 10,625$ 11,250$

Pull-through Percentage (H) 30.00% 30.00% 60.00% 60.00% 80.00% 100.00%

Net Value (G) * (H) (I) 1,125$ (375)$ -$ 6,000$ 8,500$ 11,250$

Value Recorded 1,125$ (1,500)$ 375$ 6,000$ 2,500$ 2,750$

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• Changes in interest rates can also affect the value of the servicing asset

• Pull-through assumptions in the marketplace are more complex than the simplified example

ADDITIONAL ECONOMIC CONSIDERATIONS FOR IRLCs

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• Market interest rates

• Type of origination – retail or wholesale

• Length of lock

• Purpose of loan – purchase or refinance

• Type of loan – fixed or variable

• Processing status of loan

FACTORS AFFECTING PULL-THROUGH

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• Mandatory delivery

• Best efforts delivery

• Master agreements

TYPES OF SALES COMMITMENTS

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• An institution commits to deliver a certain amount of loans to an investor at a specified price on or before a specified date

• Requires a pair-off fee based on then current market prices to compensate investor for any shortfall

MANDATORY DELIVERY COMMITMENT

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• Has a “specified underlying” - the specified price

• Requires little or no initial net investment

• Has a “notional amount” - the principal amount of the loan

• Requires or permits net settlement by paying a pair-off fee based on then current market prices

• Is a derivative

MANDATORY DELIVERY COMMITMENT

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• An institution commits to deliver an individual loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes

• Generally not considered a derivative until the loan closes because it does not meet the net settlement criteria

• The result is that the change in the value of best efforts contracts will not offset the change in the value of the IRLCs for accounting purposes unless fair value is elected

• An institution will want to elect fair value if they want a “hedge” against the fluctuation in the value of the IRLC

BEST EFFORTS DELIVERY COMMITMENT

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VALUE OF FLSC – EXAMPLE Rates Loan Rates Loan LoanIncrease Has Been Drop Has Been at

Inception 50 bp Processed 100 bp Approved Close

Loan Amount (A) 250,000$ 250,000$ 250,000$ 250,000$ 250,000$ 250,000$

Lock In Interest Rate 4.500% 4.500% 4.500% 4.500% 4.500% 4.500%

Market Interest Rate 4.125% 4.625% 4.625% 3.625% 3.625% 3.625%

Market Value (B) 101.50% 99.50% 99.50% 103.50% 103.50% 103.50%

Servicing Value (C) 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%

Sales Price including SRP (D) 102.50% 102.50% 102.50% 102.50% 102.50% 102.50%

Value as a Percent of Loan (E) 0.00% 2.00% 2.00% -2.00% -2.00% -2.00% (D) - (B) - (C)

Dollar Value (A) * (E) (F) -$ 5,000$ 5,000$ (5,000)$ (5,000)$ (5,000)$

Pull-through Percentage (G) 30.00% 30.00% 60.00% 60.00% 80.00% 100.00%

Net Value (F) * (G) (H) -$ 1,500$ 3,000$ (3,000)$ (4,000)$ (5,000)$

Value Recorded -$ 1,500$ 1,500$ (6,000)$ (1,000)$ (1,000)$

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• May net gains and losses of individual derivative commitments only under certain conditions, generally only under the legal right of offset

• The value of sales commitments covering the pipeline may not be netted against the value of the IRLCs, they must be reported separately

• The value of sales commitments covering the warehouse may not be netted against the value of the warehouse loans, they must be reported separately

NETTING OF DERIVATIVES FOR REPORTING PURPOSES

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• Loans Held for Sale (“LHFS”) are reported at lower of cost or market unless fair value is elected

• An institution will want to elect fair value if they want a “hedge” against the fluctuation in the value of the mandatory commitment

LOANS HELD FOR SALE

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VALUE OF LHFS – EXAMPLE Loan Rates Rates Loanat Increase Drop at

Close 50 bp 100 bp Sale

Loan Amount (A) 250,000$ 250,000$ 250,000$ 250,000$

Lock In Interest Rate 4.500% 4.500% 4.500% 4.500%

Market Interest Rate 3.625% 4.125% 3.125% 3.125%

Market Value (B) 103.50% 101.50% 105.50% 101.50%

Servicing Value (C) 1.00% 1.00% 1.00% 1.00%

Borrower Price (D) 100.00% 100.00% 100.00% 100.00%

Value as a Percent of Loan (E) 4.50% 2.50% 6.50% 2.50% (B) + (C) - (D)

Dollar Value (A) * (E) (F) 11,250$ 6,250$ 16,250$ 6,250$

Pull-through Percentage (G) 100.00% 100.00% 100.00% 100.00%

Net Value (F) * (G) (H) 11,250$ 6,250$ 16,250$ 6,250$

Value Recorded 11,250$ (5,000)$ 10,000$ (10,000)$

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• Changes in the fair value of the IRLCs, sales commitments and LHFS (depending on the circumstances) are reported as “other noninterest income” or “other noninterest expense”

INCOME STATEMENT EFFECT

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1. IRLC & Mandatory Commitments – RC-L item 15b, RC-R Part II 20 and Memoranda item 12. Best Efforts Commitments if Fair Value is elected – RC-L 9 or 10 (subject to minimum $

threshold)3. Loans Held for Sale – Gain plus UPB – RC 4.a and RC-C Part I 1. c. (2) (a)

a. RC-Q item 3 if the institution has elected fair value4. UPB IRLCs – RC-L 12.d.(1) Column A5. UPB Mandatory FLSC – RC-L 12.b Column A6. UPB of IRLC and Mandatory FLSC – RC-L 14 Column A and RC-R Memoranda 2(a)7. All Income and Expense entries are listed in RI8. Off balance sheet exposure for RC-R is 0% if less than one year

FFIEC CALL REPORT – FORM 041

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1. Best Efforts Commitments if Fair Value is elected – RC-L 9 or 10 (subject to minimum $ threshold)2. Loans Held for Sale – Gain plus UPB – RC 4.a and RC-C Part I 1. c. (2) (a)3. Schedule SU – Supplemental Information

a. Item 1 –YESb. UPB IRLCs – Item 1. c.c. UPB Mandatory FLSC – Item 1. d.d. Items 3 –YES e. UPB Loans Held for Sale – item 3 a. and item 3 b.f. LHFS Year-to-Date net gains (losses) in earnings – item 3 c. and item 3 d.

4. UPB of IRLC and Mandatory FLSC – RC-R Memoranda 2(a)5. All Income and Expense entries are listed in RI6. Off balance sheet exposure for RC-R is 0% if less than one year

FFIEC CALL REPORT – FORM 051

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1. Derivative information should be entered in Sections 1 – 5 of Appendix D in the 5300

2. Detailed instructions for these entries can be found in our Accounting and Regulatory Guidance for the Mortgage Partnership Finance® Program manual that can be downloaded from our website at www.wilwinn.com in the Insights and Resources section

NCUA CALL REPORT

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MORTGAGE SERVICING RIGHTS

• Inter-Agency Advisory Mortgage Banking February 2003

• Need to comply with rules on interest rate risk

• Need to consider how mortgage banking affects strategic, business and asset/liability plans

• Establish asset/capital limits for mortgage banking

REGULATORY PERSPECTIVE

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• MSRs are a modified interest only strip

• Many types of underlying loans

• Value varies significantly by type of MSR

RETAINED MORTGAGE SERVICING RIGHTS (MSRs)

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• Loan amount

• Servicing fee percentage – varies by investor and type of loan

• Ancillary income

• Expected loan life – prepayment and loan term

• Discount rate

• Costs to service – market costs

• Delinquency rate and foreclosure losses – recourse versus non-recourse

MAJOR VALUATION COMPONENTS

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• Servicing fees are earned monthly based on remaining principal balance

• Servicing costs should be calculated in dollars per loan

• Ancillary income includes late fees, insurance income and other fees earned

• Float and escrows (impounds) add value

VALUATION COMPONENTS DETAIL

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PWC ASSUMPTION SURVEY – RANGE OF ASSUMPTIONSSurvey as of November 30, 2017 Ancillary Income Low High Average Median

FNMA / FHLMCFixed 3.53 60.00 33.36 36.90ARM 4.01 60.00 33.59 35.29

GNMAFixed ‐ FHA 16.34 70.00 45.28 44.59ARM 20.94 71.59 48.22 47.68

Discount RateFNMA / FHLMC

Fixed ‐ 15 Yr. 8.72% 10.50% 9.46% 9.32%Fixed ‐ 30 Yr. 8.89% 10.50% 9.57% 9.45%ARM 9.00% 15.00% 11.46% 11.47%

GNMAFixed ‐ FHA 9.90% 14.26% 11.18% 11.09%ARM 9.90% 16.56% 12.53% 12.09%

Servicing CostsFNMA / FHLMC

Fixed 38.79 77.40 62.13 62.47ARM 43.25 84.22 66.84 66.00

GNMAFixed ‐ FHA 48.68 114.52 74.33 74.69ARM 51.74 103.36 76.84 77.25

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• Supply prices to solve for option adjusted spread (“OAS”) with a Monte Carlo Simulation

• Works best with residential mortgage loans and securities

• Interest rate movement is random

• Multiple simulations (thousands) of interest rate movements are performed for estimating probability distributions

STOCHASTIC MODELING

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RANDOM PATHS ASSUMING A 4% STARTING RATE AND MEAN REVERSION

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• Use of a probabilistic model consistent with the current term structure of interest rates and the assumed level of volatility

• Development of explicit pricing and valuation for embedded options, such as the prepayment option

• Use of simulation methodology that is more theoretically sound, approximating the methodologies used to value hedge instruments and mortgage securities.

OAS ADVANTAGES

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• Lack of precise market prices for specific MSAs. The OAS used in the model, like the discount rate used in static analysis, is arbitrary

• Requirement of more resources than static analysis in terms of computing power, software, and model sophistication

• Lack of set standards for OAS computation. OAS model results are highly dependent on input assumptions such as volatility, prepayment speed, default rates, inflation, the appropriate risk-free rate (Treasury or LIBOR), and the setting of model parameters, all of which can result in different OAS and MSA values

• Lack of consistency in OAS model methodology that may result in asset valuation differences

OAS DISADVANTAGES

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• Production channel – retail versus wholesale

• Current economic conditions in the region

• Recent changes in home prices

OTHER KEY VALUATION VARIABLES

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Value Change % Change

Base 1.115%

Prepayments increase 30% 1.007% -0.107% -9.6%

Servicing costs increase 30% 1.056% -0.059% -5.3%

Delinquencies increase 30% 1.113% -0.002% -0.1%

Discount rate increases 30% 0.994% -0.120% -10.8%

Source: Wilary Winn, May 31, 2018

VALUATION OF CONFORMING CONVENTIONAL

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MSR YIELD CURVE AND NEGATIVE CONVEXITY

Source: Wilary Winn, May 31, 2018

0.500%

0.750%

1.000%

1.250%

1.500%

-200 bps -100 bps -50 bps Base +50 bps +100 bps +200 bps

Change in Interest Rates

30 Year Conforming Conventional Par Rate Servicing Fee Value

Value

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100

200

300

400

500

600

700

800

0.400%

0.550%

0.700%

0.850%

1.000%

1.150%

1.300%

1.450%Mar. 200

8

Sept. 2008

Mar. 200

9

Sept. 2009

Mar. 201

0

Sept. 2010

Mar. 201

1

Sept. 2011

Mar. 201

2

Sept. 2012

Mar. 201

3

Sept. 2013

Mar. 201

4

Sept. 2014

Mar. 201

5

Sept. 2015

Mar. 201

6

Sept. 2016

Mar. 201

7

Sept. 2017

Mar. 201

8

Value of MSR Asset

MSR Value % Prepayment Speed

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• The operational / macro hedge

• Hedge with positive convexity instruments

• Utilize appropriate amortization methodology

MANAGING RUN-OFF RISK

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• Accounting and reporting for MSRs is set forth in FAS ASC 860-50

ACCOUNTING IMPLICATIONS

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• A servicing asset or liability arises each time an institution undertakes an obligation to service a financial asset by entering into a servicing contract in connection with –

1. a transfer that meets the requirements for true sale or

2. the acquisition or assumption of a servicing obligation not related to the financial assets of the servicer

EXISTENCE OF SERVICING - FAS ASC 860-50-25-1

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The benefits of the servicing, including the servicing fees, ancillary income, float, etc. must exceed “adequate compensation” in order to have a servicing asset. If not, the servicer has a liability.

Adequate compensation includes a profit and is determined by the marketplace. It is based on marketplace costs, not the servicer’s internal costs.

MSR ASSET OR LIABILITY - FAS ASC 860-50-30

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• Servicing assets and liabilities must be reported separately

• A servicing asset can become a servicing liability over its life and vice versa

INITIAL RECORDING

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• Record MSR at fair value – quoted price for exact or similar asset would be best – discounted cash flow can be used in the absence of trade information

• Industry believes MSRs are Level 2 or Level 3 assets based on a discounted cash flow model

• Value excess servicing separately - true IO

o Creation of the IO does not violate true sale, if part of overall consideration for the 100% sale of the loan

INITIAL RECORDING

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• FAS ASC paragraph 860-50-35-1 allows the asset to be measured and reported in one of two ways:

1. Amortization Method

2. Fair Value Method

• A servicer can select either method, but cannot switch methodologies unless it moves to the Fair Value method at the beginning of the fiscal year before interim financial statements have been released. A servicer cannot go back to the amortization method after it has elected Fair Value

HOW TO ACCOUNT FOR THE MSR AFTER INITIAL RECORDING?

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• Amortize the MSR in proportion and over the period of estimated net servicing income (level yield method) and assess servicing assets for impairment based on fair value at each reporting date.

AMORTIZATION METHOD

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• Impairment is best measured at the loan level and is reported at the predominant risk characteristic stratum

• There is a difference between temporary impairment, which is accounted for through an allowance and permanent impairment, which requires a direct write-off

IMPAIRMENT

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ABC CREDIT UNION – 1.07 BILLION SERVICING PORTFOLIO VALUATION AS OF JUNE 30, 2016

Principal # of Avg Service T&I Prepayment Servicing Fair Fair Book Fair Value - Bal. SheetBalance Loans WAC WAM Age Life Fee Total PSA Multiple Value % Value $ Value $ Book Value Impact

40, 30 & 25 year less than 4.750% 634,133,451 2,551 3.915% 332 28 5.36 0.250% 702,461 259 3.3 0.837% 5,304,653 5,706,265 (401,612) (401,612) 4.750% - 6.750% 59,108,341 348 5.212% 281 82 4.49 0.250% 64,048 283 2.9 0.718% 424,239 399,823 24,415 - greater than 6.750% 657,052 8 7.328% 190 178 3.56 0.250% 681 326 2.1 0.530% 3,485 1,946 1,539 - Total 30 & 25 year 693,898,844 2,907 4.028% 327 33 5.28 0.250% 767,190 262 3.3 0.826% 5,732,376 6,108,034 (375,658) (401,612)

20 year less than 4.625% 85,562,305 408 3.780% 210 30 4.69 0.250% 104,276 242 3.1 0.764% 654,062 657,650 (3,588) (3,588) 4.625% - 6.625% 3,507,426 25 4.797% 167 73 3.60 0.250% 4,219 283 2.4 0.601% 21,067 13,890 7,177 - greater than 6.625% - - 0.000% 0 0 0.00 0.000% - 0 0.0 0.000% - - - - Total 20 year 89,069,732 433 3.820% 208 32 4.65 0.250% 108,495 244 3.0 0.758% 675,129 671,540 3,589 (3,588)

15 year less than 4.500% 286,899,197 1,715 3.306% 146 34 3.70 0.250% 311,254 252 2.5 0.626% 1,795,152 1,756,580 38,571 - 4.500% - 6.500% 1,610,842 20 4.762% 101 79 2.76 0.250% 2,144 270 1.7 0.424% 6,822 3,422 3,400 - greater than 6.500% - - 0.000% 0 0 0.00 0.000% - 0 0.0 0.000% - - - - Total 15 year 288,510,040 1,735 3.314% 146 34 3.70 0.250% 313,398 252 2.5 0.625% 1,801,974 1,760,002 41,972 -

10 year & Balloons less than 4.125% 380,017 2 3.033% 89 31 2.91 0.250% 674 190 2.1 0.518% 1,969 378 1,591 - 4.125% - 6.125% - - 0.000% 0 0 0.00 0.000% - 0 0.0 0.000% - - - - greater than 6.125% - - 0.000% 0 0 0.00 0.000% - 0 0.0 0.000% - - - - Total 10 year & bal. 380,017 2 3.033% 89 31 2.91 0.250% 674 190 2.1 0.518% 1,969 378 1,591 -

Total excluding ARMs 1,071,858,632 5,077 3.818% 269 33 4.80 0.250% 1,189,757 258 3.1 0.766% 8,211,448 8,539,955 (328,506) (405,200)

ARMs 75,415 3 3.118% 67 293 1.75 0.380% - 438 0.7 0.276% 208 72 136 -

Grand Total 1,071,934,048 5,080 3.818% 269 33 4.80 0.250% 1,189,757 258 3.1 0.766% 8,211,657 8,540,027 (328,371) (405,200)

Current Impairment Reserve (27,197)

(Additional) / Excess Impairment Reserve (378,003)

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• The fair value is determined at each reporting period

• The asset is adjusted to equal its fair value

• The difference is taken into income or expense for that reporting period

• Institutions that hedge their servicing rights portfolios can benefit from the fair value method because the accounting is less complex than under FAS ASC Topic 815 –Derivatives and Hedging. Institutions that do not hedge their portfolios and that elect the fair value method could experience earnings volatility.

FAIR VALUE METHOD

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• Requires comprehensive documentation of valuation process

• Valuation must be based on reasonable and supportable assumptions and major changes to assumptions must be approved

• Compare assumptions to actual results

• Use appropriate amortization and recognize impairment timely

INTER-AGENCY ADSORY - MSRs

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• Understand the major assumptions used in the model

• Mark to the model and run shock analyses at least quarterly

• Understand the current market

• Seek expert advice when needed

RECOMMENDATIONS

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• Effective January 10, 2014

• Exempts small servicers - - under 5,000 loans

CFPB NATIONAL SERVICING STANDARDS

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1. Total volume of loans sold - Schedule RC-S, item 11A and RC-S, Memoranda, item 2a (with recourse) or item 2b (without recourse)

2. Book value of retained servicing – RC-M, Memoranda, item 2a

3. Estimated fair value of retained servicing – RC-M, Memoranda, item 2a(1)

4. Gain or Loss on loan sales for the quarter should be reported on Schedule RI, item 5i

5. Net servicing fees for the quarter should be reported on Schedule RI, item 5f

FFIEC CALL REPORT REQUIREMENTS FOR MORTGAGE SERVICING RIGHTS – FORM 041

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Schedule RC-P – 1-4 Family Residential Mortgage needs to be completed if the following is true:

1. The Bank has over $1 Billion in Total Assets.

2. The Bank has less than $1 Billion in Total Assets at which either 1-4 family residential mortgage loan originations and purchases for resale from all sources, loan sales, or quarter-end loans held for sale exceed $10 Million for two consecutive quarters.

FFIEC CALL REPORT REQUIREMENTS FOR MORTGAGE BANKING ACTIVITIES – FORM 041

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1. Schedule SUa. Item 5 – Servicing Retained with Recourse –YESb. Item 5 a. – Outstanding UPB of loans sold with recoursec. Item 6 – Servicing Retained without Recourse –YESd. Item 6 a. – Outstanding UPB of loans sold without recourse

2. Book value of retained servicing – RC-M, Memoranda, item 2a

3. Estimated fair value of retained servicing – RC-M, Memoranda, item 2a(1)

4. Gain or Loss on loan sales for the quarter should be reported on Schedule RI, item 5i

5. Net servicing fees for the quarter should be reported on Schedule RI, item 5f

FFIEC CALL REPORT REQUIREMENTS FOR MORTGAGE SERVICING RIGHTS – FORM 051

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Schedule SU – 1-4 Family Residential Mortgage Banking Activities

1. Item 2 – For 2 calendar quarters preceding the current quarter did the institution meet one or both of the following mortgage banking activity thresholds: 1. Sales of 1-4 family residential mortgage loans during the calendar quarter exceeded $10 million, or 2. 1-4 family residential mortgage loans held for sale or trading as of calendar quarter-end exceeded $10 million?

2. Item 2 a. Principal amount of 1-4 family residential mortgage loans sold during the quarter

3. Item 2 b. Quarter-end amount of 1-4 family residential mortgage loans held for sale or trading.

FFIEC CALL REPORT REQUIREMENTS FOR MORTGAGE BANKING ACTIVITIES – FORM 051

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• MSRs are limited to 10% of CET 1 and are part of the 15% CET 1 limitation

• Phase on limitation – 60% in 2016 and then 20% per year – now it is fully phased in.

• MSRs previously were risk weighted at 100% of eligible portion until 1/1/2018, now MSRs require a 250% risk weight.

BASEL III

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1. Servicing fees are included in Non-Interest Income – Page 5, line 12

2. Loan servicing expenses are included in Non-Interest Expense – Page 5, line 25

3. Total amount of 1st mortgage loans sold into the secondary market year-to-date is reported on Schedule A, line 18

4. Amount of real estate loans sold but serviced by the credit union (dollar amount of servicing) is reported on Schedule A, line 20

5. The MSR book value is reported on Schedule A, line 21

6. MSR book value risk weighted at 250% under new risk-based capital rule

NCUA CALL REPORT REQUIREMENTS FOR MORTGAGE SERVICING RIGHTS

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1. Wilary Winn can perform a valuation of a servicer’s entire mortgage servicing portfolio. The valuation will include determining the values of the MSR at the Loan Level and assisting with any questions related to the accounting for the portfolio.

2. For those electing the amortization method for MSRs, Wilary Winn will incorporate the MSR into a loan level basis roll forward file, which will provide information necessary to produce the amortization journal entries going forward. The file will also include a section where newly sold loans can be added and the amount of the new MSR will be calculated; the amortization for these loans will also be calculated.

HOW WILARY WINN CAN HELP

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CONTACT INFORMATION

Wilary Winn LLC

First National Bank Building

332 Minnesota Street, Suite W1750

St. Paul, MN 55101

651-224-1200

www.wilwinn.com

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SERVICES AND CONTACT INFORMATION

Asset Liability Management, Capital Stress Testing, Concentration Risk Analyses and CECL:

Matt Erickson [email protected]

Servicing Rights and Mortgage Banking Derivatives:

Eric Nokken [email protected]

Credit Union Mergers, Bank Acquisitions, ALM Validations and Goodwill Impairment Testing:

Sean Statz [email protected]

Non-agency MBS, ASC 310-30 and TDRs:

Frank Wilary [email protected]

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WILARY WINN LLC

Questions?

Documents

FFIEC CAPITAL MARKETS CONFERENCE€¦ · FFIEC CAPITAL MARKETS CONFERENCE Mortgage Pipeline Risk Management and Evaluating & Valuing Mortgage Servicing Rights Eric Nokken, Director