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Commercial Mortgage Banking | 6 Months Ended
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Jun. 30, 2014
Transfers and Servicing [Abstract] |
Commercial Mortgage Banking | Commercial mortgage banking OMHHF is engaged in the business of originating and servicing FHA insured multifamily and healthcare facility loans and securitizing these loans into 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 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 $1.5 million and $1.8 million for the three and six months ended June 30, 2014, respectively ($7.7 million and $10.7 million for the three and six months ended June 30, 2013, 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 sale contracts 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. Loans Held For Sale 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 held for sale is recorded on the condensed consolidated balance sheet. 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, a liability for the warehouse facility payable is recorded in other liabilities on the condensed consolidated balance sheet. Loans held for sale are recorded at fair value through earnings. Escrows Held in Trust Custodial escrow accounts relating to loans serviced by OMHHF totaled $251.6 million at June 30, 2014 ($251.4 million at December 31, 2013). These amounts are not included on the condensed consolidated balance sheets 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, 2014 was approximately $154.0 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. The total unpaid principal balance of loans the Company was servicing for various institutional investors was as follows:
(Expressed in thousands) |  |  |
| As of June 30, 2014 |  | As of December 31, 2013
Unpaid principal balance of loans | 3,985,594 |  |  | $ | 3,885,437 |
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. See Note 5, Financial instruments, for more information. OMHHF uses the amortization method for subsequent measurement, subject to annual impairment. The Company reviews the capitalized MSRs for impairment quarterly by comparing the aggregate carrying value of the MSR portfolio to the aggregate estimated fair value of the portfolio. The fair value of our MSRs is subject to market risk. Changes in interest rates influence a variety of assumptions included in the valuation of MSRs, including prepayment speeds, expected returns, the value of escrow balances and other servicing valuation elements. A decline in interest rates generally increases the payment rate of the servicing portfolio and therefore reduces the estimated fair value of MSRs. The fair value of the servicing rights on the loan portfolio was $40.7 million and $40.1 million at June 30, 2014 and December 31, 2013, respectively (carrying value of $29.1 million and $28.9 million at June 30, 2014 and December 31, 2013, respectively). The following table summarizes the changes in carrying value of MSRs for the six months ended June 30, 2014 and 2013:
(Expressed in thousands) |  |  |
| Six Months Ended June 30,
| 2014 |  | 2013
Balance at beginning of period | $ | 28,879 |  |  | $ | 26,983 |
Originations (1) | 2,474 |  |  | 4,638 |
Purchases | 52 |  |  | 1,165 |
Disposals (1) | (776 | ) |  | (4,583 | )
Amortization expense | (1,514 | ) |  | (538 | )
Balance at end of period | $ | 29,115 |  |  | $ | 27,665 |
(1) | Includes refinancings.
Servicing rights are amortized using the straight-line method over 10 years. Future amortization expense is as follows:
(Expressed in thousands) |  |  |  |  |
| Originated MSRs |  | Purchased MSRs |  | Total MSRs
2014 | $ | 1,452 |  |  | $ | 704 |  |  | $ | 2,156 |
2015 | 2,905 |  |  | 1,407 |  |  | 4,312 |
2016 | 2,895 |  |  | 1,393 |  |  | 4,288 |
2017 | 2,868 |  |  | 1,364 |  |  | 4,232 |
2018 | 2,768 |  |  | 1,339 |  |  | 4,107 |
Thereafter | 7,376 |  |  | 2,644 |  |  | 10,020 |
| $ | 20,264 |  |  | $ | 8,851 |  |  | $ | 29,115 |
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, 2014 and 2013 were as follows:
(Expressed in thousands) |  |  |  |  |  |  |
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Servicing fees | $ | 1,376 |  |  | $ | 1,244 |  |  | $ | 2,720 |  |  | $ | 2,452 |
Late fees | 5 |  |  | 12 |  |  | 5 |  |  | 75 |
Ancillary fees | 75 |  |  | 64 |  |  | 168 |  |  | 121 |
Total MSR fees | $ | 1,456 |  |  | $ | 1,320 |  |  | $ | 2,893 |  |  | $ | 2,648 |

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