GUARANTEES

9 Months Ended

Sep. 30, 2022

At September 30, 2022 and December 31, 2021, the notional amount of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $25.7 million and $25.2 million, respectively.

OFG has a liability for residential mortgage loans sold subject to credit recourse pursuant to GNMA’s and FNMA’s residential mortgage loan sales and securitization programs. At September 30, 2022 and December 31, 2021, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $113.4 million and $121.8 million, respectively.

The following table shows the changes in OFG’s liability for estimated losses from these credit recourse agreements, included in the consolidated statements of financial condition during the quarters and nine-month periods ended September 30, 2022 and 2021:


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2022		2021		2022		2021
	(In thousands)
Balance at beginning of period	$	174	$	205	$	294	$	218
Net recoveries (charge-offs/terminations)	(6)		86		(126)		73
Balance at end of period	$	168	$	291	$	168	$	291

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 OFG is obligated to repurchase the loan.

If a borrower defaults, pursuant to the credit recourse provided, OFG is required to repurchase the loan or reimburse the third-party investor for the incurred loss. The maximum potential amount of future payments that OFG 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 ended September 30, 2022 and 2021, OFG repurchased $119 thousand and $517 thousand, respectively, in mortgage loans subject to the credit recourse provisions referred above. During the nine-month periods ended September 30, 2022 and 2021, OFG repurchased $1.5 million and $2.4 million, respectively, in such mortgage loans. If a borrower defaults, OFG has rights to the underlying collateral securing the mortgage loan. OFG 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 September 30, 2022, OFG’s liability for estimated credit losses related to loans sold with credit recourse amounted to $168 thousand (December 31, 2021– $294 thousand).

When OFG sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. OFG’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 OFG to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, OFG may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. During the quarter ended September 30, 2022, OFG repurchased $5.0 million (September 30, 2021 – $8.8 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to the credit recourse provisions referred above. During the nine-month period ended September 30, 2022, Oriental repurchased $20.3 million (September 30, 2021 – $31.4 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to such credit recourse provision. At September 30, 2022 and December 31, 2021, OFG had a $1.6 million and a $3.4 million liability, respectively, for the estimated credit losses related to these loans.

During the quarters ended September 30, 2022 and 2021, OFG recognized $6 thousand in gains and $85 thousand in losses, net of reserves, respectively, from the repurchase of residential mortgage loans sold subject to credit recourse, and $210 thousand and $728 thousand in losses, respectively, from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties. During the nine-month periods ended September 30, 2022 and 2021, Oriental recognized $127 thousand in gains and $153 thousand in losses, respectively, from the repurchase of residential mortgage loans sold subject to credit recourse, and $261 thousand and $3.5 million, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.

At September 30, 2022, OFG serviced $5.8 billion (December 31, 2021 - $5.7 billion) in mortgage loans for third parties. 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 OFG to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. OFG 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, OFG must absorb the cost of the funds it advances during the time the advance is outstanding. OFG 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 OFG would not receive any future servicing income with respect to that loan. At September 30, 2022, the outstanding balance of funds advanced by OFG under such mortgage loan servicing agreements was approximately $10.4 million (December 31, 2021 - $12.9 million). To the extent the mortgage loans underlying OFG’s servicing portfolio experience increased delinquencies, OFG 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.