SERVICING RIGHTS

The Company retains MSRs from certain of its sales of residential mortgage loans. MSRs on residential mortgage loans are reported at fair value. Income earned by the Company on its MSRs is derived primarily from contractually specified mortgage servicing fees and late fees, net of curtailment costs and third party subservicing costs. The Company retains servicing rights in connection with its SBA loan operations, which are measured using the amortization method.

The following table presents a composition of total income from servicing rights, which is reported in Loan Servicing Income on the Consolidated Statements of Operations, on a consolidated operations basis, for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
($ in thousands)	2018			2017
Servicing fees for sold loans with servicing retained	$	3,231		$	6,210
Losses on the fair value and runoff of servicing rights	(920		)	(1,903		)
Total income from servicing rights	$	2,311		$	4,307

During the year ended December 31, 2016, the Company entered into a flow-agreement establishing general terms for the purchase and sale to a third party MSR investor in connection with SFR mortgage loan sales to GSEs. The flow-agreement allowed the Company to sell its MSRs to a third party investor contemporaneous with the Company’s sales of its servicing retained SFR mortgages to the GSEs. During the three months ended March 31, 2017, the Company suspended sales of MSRs under the flow-agreement. The Company does not expect to resume sales under the flow-agreement, as the Company has discontinued its mortgage banking activities.

During the three months ended March 31, 2018, the Company sold $26.0 million of MSRs on approximately $3.21 billion in unpaid principal balances of conventional agency mortgage loans for cash consideration of $27.3 million, subject to adjustment under certain circumstances. This transaction resulted in a loss on sale of MSRs of $2.3 million, primarily related to transaction costs, provision for early repayments of loans and expected repurchase obligations under standard representations and warranties.

The following table presents a composition of servicing rights, on a consolidated operations basis, as of the dates indicated:



($ in thousands)	March 31, 2018		December 31, 2017
Mortgage servicing rights, at fair value	$	4,953	$	31,852
SBA servicing rights, at amortized cost	1,786		1,856
Total	$	6,739	$	33,708

Mortgage loans sold with servicing retained are subserviced by a third party vendor. The unpaid principal balance of these loans at March 31, 2018 and December 31, 2017 was $591.2 million and $3.94 billion, respectively. Custodial escrow balances maintained in connection with serviced loans were $1.5 million and $17.8 million at March 31, 2018 and December 31, 2017, respectively.

Mortgage Servicing Rights

At March 31, 2018 and December 31, 2017, MSRs held-for-sale of $2.9 million and $29.8 million, respectively, were valued based on a market bid adjusted for expected obligations under standard representations and warranties and included as Level 3 fair value. The following table presents the key characteristics, inputs and economic assumptions used to estimate the Level 3 fair value of the MSRs as of the dates indicated:



($ in thousands)	March 31, 2018			December 31, 2017
Fair value of retained MSRs	$	2,102		$	2,059
Discount rate	13.00		%	13.00		%
Constant prepayment rate	15.68		%	16.54		%
Weighted-average life	5.30 years			5.07 years

The following table presents activity in the MSRs, on a consolidated operations basis, for the periods indicated:



	Three Months Ended March 31,
($ in thousands)	2018			2017
Balance at beginning of period	$	31,852		$	76,121
Additions	—			7,801
Sales of servicing rights⁽¹⁾	(25,979		)	(39,186		)
Changes in fair value resulting from valuation inputs or assumptions	(874		)	(44		)
Other	(46		)	(1,859		)
Balance at end of period	$	4,953		$	42,833

(1) Includes $37.8 million of MSRs sold as a part of discontinued operations for the three months ended March 31, 2017.

SBA Servicing Rights

The Company used a discount rate of 8.75 percent to calculate the present value of cash flows and an estimated prepayment speed based on prepayment data available. Discount rates and prepayment speeds are reviewed quarterly and adjusted as appropriate. The following table presents activity in the SBA servicing rights for the periods indicated:



	Three Months Ended March 31,
($ in thousands)	2018			2017
Balance at beginning of period	$	1,856		$	1,496
Additions	—			186
Amortization, including prepayments	(70		)	(47		)
Impairment	—			(17		)
Balance at end of period	$	1,786		$	1,618