Huntington National Bank 2007 Annual Report Download - page 93

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recorded as interest income for these loans totaled $2.3 million, $3.4 million, and $1.9 million for 2007, 2006, and 2005,
respectively.
6. LOAN SALES AND SECURITIZATIONS
RESIDENTIAL MORTGAGE LOANS
For the years ended December 31, 2007 and 2006, Huntington sold $109.5 million and $247.4 million of residential mortgage
loans held for investment, resulting in minimal pre-tax gains in each year.
A mortgage servicing right (MSR) is established only when the servicing is contractually separated from the underlying mortgage
loans by sale or securitization of the loans with servicing rights retained. MSRs are accounted for under the fair value provisions of
Statement No. 156. The same risk management practices are applied to all MSRs and, accordingly, MSRs were identified as a single
asset class and were re-measured to fair value as of January 1, 2006, with an adjustment of $12.1 million, net of tax, to retained
earnings.
At initial recognition, the MSR asset is established at its fair value using assumptions that are consistent with assumptions used at
the time to estimate the fair value of the total MSR portfolio. Subsequent to initial capitalization, MSR assets are carried at fair
value and are included in accrued income and other assets. Any increase or decrease in fair value during the period is recorded as
an increase or decrease in servicing income, which is reflected in non-interest income in the consolidated statements of income.
The following table is a summary of the changes in MSR fair value for the years ended December 31, 2007 and 2006:
(in thousands) 2007 2006
Fair value, beginning of period $131,104 $109,890
New servicing assets created 32,058 29,013
Servicing assets acquired 81,450 2,474
Change in fair value during the period due to:
Time decay
(1)
(6,226) (4,086)
Payoffs
(2)
(14,361) (11,058)
Changes in valuation inputs or assumptions
(3)
(16,131) 4,871
Fair value, end of year $207,894 $131,104
(1) Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns.
(2) Represents decrease in value associated with loans that paid off during the period.
(3) Represents change in value resulting primarily from market-driven changes in interest rates.
MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and
conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow
model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments,
delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions
used may have a significant impact on the valuation of MSRs.
A summary of key assumptions and the sensitivity of the MSR value at December 31, 2007 to changes in these assumptions
follows:
(in thousands) Actual
10%
adverse
change
20%
adverse
change
Decline in fair
value due to
Constant pre-payment rate 13.34% $(9,488) $(18,601)
Discount rate 9.28 (7,004) (13,557)
Caution should be used when reading these sensitivities as a change in an individual assumption and its impact on fair value is
shown independent of changes in other assumptions. Economic factors are dynamic and may counteract or magnify sensitivities.
Servicing fees, net of amortization of capitalized servicing assets, included in mortgage banking income amounted to $15.4 million,
$9.5 million, and $3.8 million in 2007, 2006, and 2005, respectively. The unpaid principal balance of residential mortgage loans
serviced for third parties was $15.1 billion, $8.3 billion, and $7.3 billion at December 31, 2007, 2006, and 2005, respectively.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUNTINGTON BANCSHARES INCORPORATED