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Commercial mortgage banking | 3 Months Ended
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Mar. 31, 2013
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Commercial mortgage banking | 6. Commercial mortgage banking OMHHF is engaged in the business of originating and servicing Federal Housing Administration (“FHA”) insured multifamily and healthcare facility loans and securitizing these loans into Ginnie Mae (“GNMA”) mortgage backed securities. OMHHF also offers mortgage services to developers of commercial properties including apartments, elderly housing and nursing homes that satisfy FHA criteria. OMHHF maintains a mortgage servicing portfolio for which it provides a full array of services, including the collection of mortgage payments from mortgagees which are passed on to the mortgage holders, construction loan management and asset management. The Company owns an 83.68% controlling interest in OMHHF. The 16.32% non-controlling interest belongs to one related third party who is the President of OMHHF. Loan Origination Fees OMHHF receives origination fees and incurs other direct origination costs when it originates mortgage loans. Due to the nature of its business and pre-selling loans to third parties, OMHHF recognizes origination fees and other direct origination costs at the time of the origination. As an inducement to have customers refinance, OMHHF absorbs the cost of customer’s prepayment penalties. Prepayment penalties are recorded as contra-revenue. The prepayment penalties were $3.0 million and $1.1 million for the period ended March 31, 2013 and March 31, 2012, respectively. Funding Commitments OMHHF provides its clients with commitments to fund FHA-insured permanent or constructions loans. Upon providing these commitments to fund, OMHHF enters into TBA transactions directly, or indirectly through its affiliate, Oppenheimer, with counterparties to offset its exposures related to these funding commitments. See Note 5, Financial Instruments, for more information. Mortgage Receivables OMHHF advances funds from its own cash reserves in addition to obtaining financing through warehouse facilities in order to fund initial loan closing and subsequent construction loan draws. Prior to the GNMA securitization of a loan, a loan receivable is recorded in other assets with an equal and offsetting liability for the warehouse facility payable, which is recorded in other liabilities on the condensed consolidated balance sheet. Escrows Held in Trust Custodial escrow accounts relating to loans serviced by OMHHF totaled $228.3 million at March 31, 2013 ($242.7 million at December 31, 2012). These amounts are not included on the condensed consolidated statements of financial condition as such amounts are not OMHHF’s assets. Certain cash deposits at financial institutions exceeded the FDIC insured limits. The combined uninsured balance with relation to escrow accounts at March 31, 2013 is approximately $122.4 million. OMHHF places these deposits with major financial institutions where they believe the risk is minimal, and that meet or exceed GNMA required credit ratings. Mortgage Servicing Rights (“MSR’s”) OMHHF purchases or originates mortgage loans that are sold and securitized into GNMA mortgage backed securities. OMHHF retains the servicing responsibilities for the loans securitized and recognizes either a MSR asset or a MSR liability for that servicing contract. OMHHF receives annual servicing fees equal to a percentage of the outstanding principal balance of the loans being serviced. OMHHF estimates the initial fair value of the servicing rights based on the present value of future net servicing income, adjusted for factors such as discount rate and prepayment. OMHHF uses the amortization method for subsequent measurement, subject to annual impairment. The fair value of the servicing rights on the loan portfolio was $34.4 million and $33.0 million at March 31, 2013 and December 31, 2012, respectively (carrying value of $27.2 million and $27.0 million at March 31, 2013 and December 31, 2012, respectively). The following tables summarize the changes in MSR’s for the three months ended March 31, 2013 and March 31, 2012:
(expressed in thousands of dollars) |  |  |
Balance, as of December 31, 2012 |  | $ | 26,983 |
Originations (1) |  |  | 1,540 |
Purchases |  |  | 186 |
Disposals (1) |  |  | (882 | )
Amortization expense |  |  | (640 | )
Balance, as of March 31, 2013 |  | $ | 27,187 |
(1) | Includes refinancing.
(expressed in thousands of dollars) |  |  |
Balance, as of December 31, 2011 |  | $ | 22,795 |
Originations (1) |  |  | 1,299 |
Purchases |  |  | 1,252 |
Disposals (1) |  |  | (448 | )
Amortization expense |  |  | (672 | )
Balance, as of March 31, 2012 |  | $ | 24,226 |
(1) | Includes refinancing.
Servicing rights are amortized using the straight-line method over 10 years. Amortization expense for the next five years is as follows:
(expressed in thousands of dollars) |  |  |
2013 |  | $ | 3,309 |
2014 |  |  | 3,291 |
2015 |  |  | 3,291 |
2016 |  |  | 3,286 |
2017 |  |  | 3,259 |
Thereafter |  |  | 10,751 |
|  | $ | 27,187 |
The Company receives fees during the course of servicing the mortgage loans. The amount of these fees for the three months ended March 31, 2013 and 2012 were as follows:
|  | For the Three months ended March 31, |
(expressed in thousands of dollars) |  | 2013 |  |  | 2012 |
Servicing fees |  | $ | 1,208 |  |  | $ | 927 |
Late fees |  |  | 62 |  |  |  | 23 |
Ancillary fees |  |  | 57 |  |  |  | 97 |
Total MSR fees |  | $ | 1,327 |  |  | $ | 1,047

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