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4) Loans Held For Sale

9 Months Ended

Sep. 30, 2020

4) Loans Held for Sale

The Company has elected the fair value option for loans held for sale. Changes in the fair value of the loans are included in mortgage fee income. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on mortgage loans held for investment and is included in mortgage fee income on the condensed consolidated statement of earnings. There is one loan with an unpaid principal balance of $190,560 that is 90 or more days past due and on a nonaccrual status as of September 30, 2020. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.

The following is a summary of the aggregate fair value and the aggregate unpaid principal balance of loans held for sale for the periods presented:

	As of September 30 2020	As of December 31 2019

Aggregate fair value	$ 445,878,979	$ 213,457,632
Unpaid principal balance	428,860,105	206,417,122
Unrealized gain	17,018,874	7,040,510

Mortgage Fee Income

Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans held for sale.

Major categories of mortgage fee income for loans held for sale are as follows:

	Three Months Ended September 30		Nine Months Ended September 30
	2020	2019	2020	2019
Loan fees	$ 20,630,052	$ 8,438,471	$ 40,167,476	$ 22,162,455
Interest income	3,348,929	2,127,775	7,630,993	5,032,505
Secondary gains	70,627,864	27,574,294	151,215,666	66,434,923
Change in fair value of loan commitments	3,901,086	378,899	12,454,218	1,915,223
Change in fair value of loans held for sale	1,404,131	1,411,322	4,231,347	2,065,978
Provision for loan loss reserve	(1,352,438)	(195,009)	(3,489,982)	(449,894)
Mortgage fee income	$ 98,559,624	$ 39,735,752	$ 212,209,718	$ 97,161,190

Loan Loss Reserve

When a repurchase demand corresponding to a mortgage loan previously held for sale and sold to a third-party investor is received from a third-party investor, the relevant data is reviewed and captured so that an estimated future loss can be calculated. The key factors that are used in the estimated loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance, (v) interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase demand. In many instances, the Company is able to resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor.

The following is a summary of the loan loss reserve that is included in other liabilities and accrued expenses:

	As of September 30 2020	As of December 31 2019
Balance, beginning of period	$ 4,046,288	$ 3,604,869
Provision on current loan originations (1)	3,489,982	643,284
Charge-offs, net of recaptured amounts	(4,527,157)	(201,865)
Balance, end of period	$ 3,009,113	$ 4,046,288

(1) Included in mortgage fee income

The Company maintains reserves for estimated losses on current production volumes. For the nine months ended September 30, 2020, $3,489,982 in reserves were added at a rate of 8.9 basis points per loan, the equivalent of $890 per $1,000,000 in loans originated. This is an increase over the nine months ended September 30, 2019, when reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated. The economic impact of COVID-19 and subsequent government action has increased the potential for losses due to early payoff penalties and potential for losses due to increased delinquency. The unique nature of these current events creates significant difficulty for forecasting potential future losses. Based on the Company’s best estimate for potential loan losses and considering published industry data, a loss reserve of 8 basis points per loan originated will be used in the fourth quarter 2020. The Company will continue to monitor data and economic conditions in order to maintain adequate loss reserves on current production.

During the third quarter 2020, the loan loss reserve decreased significantly primarily due to a $3,000,000 settlement that was paid to an investor for loans originated between 2004 and 2007. No additional loss reserves are being held for loans originated between 2004 and 2007.

Thus, the Company believes that the final loan loss reserve as of September 30, 2020, represents its best estimate for adequate loss reserves on loans sold.