Navy Federal Credit Union 2014 Annual Report Download - page 43

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Financial Section 25
2014 | A YEAR IN REVIEW
The changes in fair value of MSRs during 2014 and 2013 were as follows:
(dollars in thousands) 2014 2013
Balance, beginning of period $ 236,579 $ 144,089
Originations 34,063 69,716
Payos/maturities (24,464) (40,349)
Gain/(loss)(1) (10,377) 63,123
Balance, end of period $ 235,801 $ 236,579
(1)Represents MSR value changes resulting primarily from market-driven changes in interest rates.
Navy Federal obtains the fair value of its MSRs from a third-party service organization, which determines
fair value by discounting projected net servicing cash flows of Navy Federal’s servicing portfolio, taking
into consideration market loan prepayment predictions and other economic factors. The fair value of
MSRs is primarily aected by changes in mortgage interest rates since rate changes cause the loan
prepayment acceleration factors to increase or decrease.
The key economic assumptions used in determining the fair value of MSRs at December 31, 2014 and
2013 were as follows:
2014 2013
Weighted-average life (years) 5.90 6.40
Prepayment rate 12.63% 11.94%
Yield-to-maturity discount rate 9.84% 10.34%
NOTE 8: LOAN SALES AND CONTINUING INVOLVEMENT
IN ASSETS TRANSFERRED
In the normal course of business, Navy Federal originates and sells qualifying residential mortgage
loans to third parties who generally securitize the loans into mortgage-backed securities that are sold
to investors. Navy Federal also directly securitizes qualifying residential mortgage loans into GNMA
mortgage-backed securities that are either sold to third-party investors, or retained by Navy Federal for
investment. Navy Federal classifies all loans it intends to transfer in a sale or securitization transaction
as MLAS.
During the year ended December 31, 2014, Navy Federal reclassified $43.8 million of mortgage
loans from held for investment to MLAS. The loans were transferred to MLAS at fair value and were
subsequently measured at fair value until the loans were sold as part of a whole loan sale for cash
proceeds of $44.0 million and an MSR of $0.4 million.
Navy Federal’s continuing involvement in loans transferred includes ongoing servicing and obligations
related to standard representations and warranties. Navy Federal may also incur incremental obligations
related to various forms of credit enhancements aorded to the third-party investors in the securities
partially backed by the transferred loans.
Servicing: Navy Federal retains mortgage servicing rights on loans transferred in sale transactions or
securitizations. See Note 7 for details. As of December 31, 2014 and 2013, the amount of loans serviced
by Navy Federal for outside investors was $20.0 billion and $19.3 billion, respectively.
Navy Federal’s servicing fees are priced based on minimum rates required by Federal National Mortgage
Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and the Government National