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 mortgagors 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 and CEO 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.

In accordance with U.S. Department of Housing and Urban Development (“HUD”) guidelines, OMHHF will, with approval and for certain loan programs, apply the GNMA trade premium toward the payment of prepayment costs that customers will incur on their prior mortgage. These costs are netted with revenues from GNMA trade premiums that are otherwise earned from these loan refinancings or modifications. Prepayment costs recorded as contra-revenue against GNMA premium were $7.7 million and $600,000 for the three month period ended June 30, 2013 and 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 $296.2 million at June 30, 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 June 30, 2013 was approximately $201.2 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 (“MSRs”)

OMHHF purchases commitments 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 monthly 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 $35.7 million and $33.0 million at June 30, 2013 and December 31, 2012, respectively (carrying value of $27.7 million and $27.0 million at June 30, 2013 and December 31, 2012, respectively). The following tables summarize the changes in MSRs for the six months ended June 30, 2013 and 2012:


(Expressed in thousands)
Balance, as of December 31, 2012	$	26,983
Originations ⁽¹⁾		4,638
Purchases		1,165
Disposals ⁽¹⁾		(4,583	)
Amortization expense		(538	)

Balance, as of June 30, 2013	$	27,665

(1)	Includes refinancing.


(Expressed in thousands)
Balance, as of December 31, 2011	$	22,795
Originations ⁽¹⁾		3,156
Purchases		1,824
Disposals ⁽¹⁾		(448	)
Amortization expense		(1,617	)

Balance, as of June 30, 2012	$	25,710

(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)
2013	$	3,553
2014		3,537
2015		3,537
2016		3,500
2017		3,433
Thereafter		10,105

	$	27,665

The Company receives fees during the course of servicing the mortgage loans. The amount of these fees for the three and six months ended June 30, 2013 and 2012 were as follows:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(Expressed in thousands)	2013		2012		2013		2012
Servicing fees	$	1,244	$	1,009	$	2,452	$	1,936
Late fees		12		5		75		28
Ancillary fees		64		67		121		164

Total MSR fees	$	1,320	$	1,081	$	2,648	$	2,128