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 Chief Executive Officer 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 $2.8 million and $13.5 million for the three and nine months ended September 30, 2013, respectively ($4.3 million and $5.9 million for the three and nine months ended September 30, 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. To the extent funds were advanced from its own cash reserves, the cash balance is reduced in an equal amount. To the extent funds were financed through the warehouse facility, an equal and offsetting liability for the warehouse facility payable 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 $272.4 million at September 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 September 30, 2013 was approximately $176.8 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 $38.5 million and $33.0 million at September 30, 2013 and December 31, 2012, respectively (carrying value of $28.1 million and $27.0 million at September 30, 2013 and December 31, 2012, respectively). The following tables summarize the changes in carrying value of MSRs for the nine months ended September 30, 2013 and 2012:

(Expressed in thousands)


Balance, as of December 31, 2012	$	26,983
Originations ⁽¹⁾		5,668
Purchases		1,108
Disposals ⁽¹⁾		(4,518	)
Amortization expense		(1,120	)

Balance, as of September 30, 2013	$	28,121

(1)	Includes refinancing.

(Expressed in thousands)


Balance, as of December 31, 2011	$	22,795
Originations ⁽¹⁾		4,337
Purchases		2,582
Disposals ⁽¹⁾		(450	)
Amortization expense		(2,337	)

Balance, as of September 30, 2012	$	26,927

(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	$	3,538
2014		3,531
2015		3,531
2016		3,498
2017		3,435
Thereafter		10,588

	$	28,121

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

(Expressed in thousands)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012
Servicing fees	$	1,287	$	1,080	$	3,739	$	3,016
Late fees		19		25		94		25
Ancillary fees		170		128		291		320

Total MSR fees	$	1,476	$	1,233	$	4,124	$	3,361