Navy Federal Credit Union 2007 Annual Report Download - page 33

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2007 Financial Section 11
Note 5: Mortgage Servicing Assets
Navy Federal capitalizes mortgage servicing rights (MSRs) when mortgage loans
are sold and Navy Federal retains the right to service the loans. Navy Federal
adopted SFAS No. 156 in 2006 and elected to record MSRs at fair value and
discontinued amortizing servicing assets and also stopped assessing impairment
adjustments related to the servicing assets.
The changes in fair value of MSRs during 2007 and 2006 were as follows (dollars in thousands):
2007 2006
Balance, beginning of period $ 198,707 $ 131,667
Fair value adjustment(1) –39,668
Originations 21,351 48,519
(Loss) on changes in value of MSRs (28,252) (21,147)
Balance, end of period $ 191,808 $ 198,707
December 31 2007 2006
Weighted average life (years) 6.32 5.85
Prepayment speed(1) 12.82% 13.91%
Yield to maturity discount rate 9.39% 9.45%
(1) As of December 31, 2005, the carrying value of MSRs under SFAS No. 140 was $39.7 million less than the fair
value. Effective January 1, 2006, with adoption of SFAS No. 156, Navy Federal increased the carrying value of
MSRs by $39.7 million to record its MSRs at the fair value.
Navy Federal obtains the fair value of its MSRs from a third-party service
organization. The service organization determines the fair value by discounting
projected net servicing cash flows of the remaining servicing portfolio. The
valuation model used by the service organization considers market loan
prepayment predictions and other economic factors. The fair value of MSRs is
mostly affected by changes in mortgage interest rates since rate changes cause
the loan prepayment acceleration factors to increase or decrease.
Navy Federal received mortgage loan servicing fees of $51.3 million and
$50.3 million in 2007 and 2006, respectively. Related late charges and
miscellaneous fees totaled $6.11 million and $7.04 million in 2007 and
2006, respectively.
The key economic assumptions used in determining the fair value of MSRs at December 31, 2006
and 2005 were as follows (at year end):
(1) Prepayment speed is the constant prepayment rate that results in the weighted average life.
Note 6: Derivative Instruments and
Economic Hedging Activities
Navy Federal is an active participant in the production of mortgage loans which
are sold to investors in the secondary market. This mortgage banking activity
involves making mortgage loan commitments to members at specified interest
rates. Navy Federal is exposed to changes in the value of its mortgage loan
commitments as interest rates may change between the time that it enters into
a mortgage loan commitment and the time that it ultimately delivers mortgage
loans to investors. To protect against this interest rate risk, Navy Federal enters
into forward sales contracts at specified prices to deliver mortgage loans to