Guarantees

6 Months Ended

Jun. 30, 2019

NOTE 18 – GUARANTEES

At June 30, 2019 and December 31, 2018, the unamortized balance of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $12.5 million and $23.9 million, respectively.

Oriental has a liability for residential mortgage loans sold subject to credit recourse pursuant to FNMA’s residential mortgage loan sales and securitization programs. At June 30, 2019 and December 31, 2018, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $5.3 million and $5.4 million, respectively.

The following table shows the changes in Oriental’s liability for estimated losses from these credit recourse agreements, included in the consolidated statements of financial condition during the quarters and six-month periods ended June 30, 2019 and 2018.

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2019		2018		2019		2018
	(In thousands)
Balance at beginning of period	$	214	$	264	$	346	$	358
Net (charge-offs/terminations) recoveries		11		(75)		(121)		(169)
Balance at end of period	$	225	$	189	$	225	$	189

The estimated losses to be absorbed under the credit recourse arrangements were recorded as a liability when the credit recourse was assumed and are updated on a quarterly basis. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 120 days delinquent, in which case Oriental is obligated to repurchase the loan.

If a borrower defaults, pursuant to the credit recourse provided, Oriental is required to repurchase the loan or reimburse the third-party investor for the incurred loss. The maximum potential amount of future payments that Oriental would be required to make under the recourse arrangements is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarters and six-month periods ended June 30, 2019 and 2018, Oriental did not repurchase any mortgage loans subject to credit recourse provision. If a borrower defaults, Oriental has rights to the underlying collateral securing the mortgage loan. Oriental suffers losses on these mortgage loans when the proceeds from a foreclosure sale of the collateral property are less than the outstanding principal balance of the loan, any uncollected interest advanced, and the costs of holding and disposing the related property. At June 30, 2019, Oriental’s liability for estimated credit losses related to loans sold with credit recourse amounted to $225 thousand (December 31, 2018– $346 thousand).

When Oriental sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. Oriental's mortgage operations division groups conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under such mortgage backed securities programs, quality review procedures are performed by Oriental to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, Oriental may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. During the quarters ended June 30, 2019, Oriental repurchased $8.1 million (June 30, 2018 – $2.4 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. During the six-month periods ended June 30, 2019, Oriental repurchased $10.0 million (June 30, 2018 – $4.7 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above.

During the quarters ended June 30, 2019 and 2018, Oriental recognized $48 thousand and $375 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $25 thousand and $31 thousand, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties. During the six-month periods ended June 30, 2019 and 2018, Oriental recognized $68 thousand and $375 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $42 thousand and $30 thousand, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including the FHLMC, require Oriental to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At June 30, 2019, Oriental serviced $892.1 million (December 31, 2018 - $895.6 million) in mortgage loans for third-parties. Oriental generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, Oriental must absorb the cost of the funds it advances during the time the advance is outstanding. Oriental must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and Oriental would not receive any future servicing income with respect to that loan. At June 30, 2019, the outstanding balance of funds advanced by Oriental under such mortgage loan servicing agreements was approximately $607 thousand (December 31, 2018 - $706 thousand). To the extent the mortgage loans underlying Oriental's servicing portfolio experience increased delinquencies, Oriental would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.