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GUARANTEES
 6 Months Ended
Jun. 30, 2023
Guarantees [Abstract]  
GUARANTEES GUARANTEES
At both June 30, 2023 and December 31, 2022, the notional amount of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $24.9 million.
OFG has a liability for residential mortgage loans sold subject to credit recourse pursuant to FHLMC's, GNMA's, and FNMA's residential mortgage loan sales and securitization programs. On May 1, 2023, OFG and a third-party servicer terminated a subservicing agreement by mutual agreement pursuant to which OFG transferred the servicing of a portion of the subserviced loans to the third-party servicer, eliminating the recourse provisions to that program.
At June 30, 2023 and December 31, 2022, the unpaid principal balance of residential mortgage loans sold subject to credit recourse under FHLMC's and FNMA's residential mortgage loan sales programs was $103.5 million and $110.9 million, respectively. 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. At June 30, 2023, OFG's liability for estimated credit losses related to loans sold with credit recourse amounted to $150 thousand (December 31, 2022– $147 thousand).
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 six month periods ended June 30, 2023 and 2022:
Quarter Ended June 30,Six-Month Period Ended June 30,
2023202220232022
(In thousands)
Balance at beginning of period$141 $294 $147 $205 
Net recoveries (charge-offs/terminations)9 (120)3 (31)
Balance at end of period$150 $174 $150 $174 
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 June 30, 2023 and 2022, OFG repurchased $545 thousand and $711 thousand, respectively, in mortgage loans. During the six month periods ended June 30, 2023 and 2022, OFG repurchased $610 thousand and $1.4 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.
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 June 30, 2023, OFG repurchased $4.2 million (June 30, 2022 – $7.5 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to the credit recourse provision. During the six month period ended June 30, 2023, OFG repurchased $6.4 million (June 30, 2022 –$15.3 million)
of unpaid principal balance in mortgage loans, excluding mortgage loans subject to such credit recourse provision. At June 30, 2023 and December 31, 2022, OFG had a $1.0 million and a $1.4 million liability, respectively, for the estimated credit losses related to these loans.
During the quarters ended June 30, 2023 and 2022, OFG recognized $141 thousand and $21 thousand in gains, net of reserves, respectively, from the repurchase of residential mortgage loans sold subject to credit recourse, and $372 thousand and $53 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, 2023 and 2022, OFG recognized $147 thousand and $121 thousand, respectively, in gains from the repurchase of residential mortgage loans sold subject to credit recourse, and $121 thousand and $51 thousand, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.
At June 30, 2023, OFG serviced $5.6 billion (December 31, 2022 - $5.8 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 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 guarantee 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 June 30, 2023, the outstanding balance of funds advanced by OFG under such mortgage loan servicing agreements was approximately $7.1 million (December 31, 2022 - $7.8 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.