Mortgage Loan Servicing and Loans Originated for Sale

The following summarizes the unpaid principal balance of loans serviced for others by the Corporation at the dates indicated:



(In Thousands)	As of June 30,
(In Thousands)	2017		2016		2015
Loans serviced for Freddie Mac	$	13,907	$	6,819	$	4,206
Loans serviced for Fannie Mae	90,076		78,250		46,582
Loans serviced for FHLB – San Francisco	15,105		20,385		28,222
Loans serviced for other investors	216		15		1,048
Total loans serviced for others	$	119,304	$	105,469	$	80,058

MSA are recorded when loans are sold to investors and the servicing of those loans is retained by the Bank. MSA are subject to interest rate risk and may become impaired when interest rates fall and the borrowers refinance or prepay their mortgage loans. The MSA are derived primarily from single-family loans.

Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures. Income from servicing loans is reported as loan servicing and other fees in the Corporation’s Consolidated Statements of Operations, and the amortization of MSA is reported as a reduction to the loan servicing income. Loan servicing income includes servicing fees from investors and certain fees collected from borrowers, such as late payment fees. As of June 30, 2017 and 2016, the Corporation held borrowers’ escrow balances related to loans serviced for others of $546,000 and $482,000, respectively.

In estimating fair values of the MSA at June 30, 2017 and 2016, the Corporation used a weighted-average constant prepayment rate (“CPR”) of 17.02% and 19.68%, respectively, and a weighted-average discount rate of 9.11% and 9.07%, respectively. Management obtained CPR estimates from an independent third party and reviewed for reasonableness given current market data. The discount rates were derived from market data. The MSA, which is included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition, had a carrying value of $739,000 and a fair value of $811,000 at June 30, 2017. This compares to the MSA at June 30, 2016 which had a carrying value of $627,000 and a fair value of $627,000. An allowance may be recorded to adjust the carrying value of each category of MSA to the lower of cost or market. As of June 30, 2017, a total allowance of $158,000 was required for eight categories of MSA, compared to a total allowance of $168,000 for nine categories of MSA as of June 30, 2016. Total additions to the MSA during the years ended June 30, 2017, 2016 and 2015 were $269,000, $394,000 and $150,000, respectively. Total amortization of the MSA during the years ended June 30, 2017, 2016 and 2015 was $167,000, $243,000 and $60,000, respectively.

Loans sold to the FHLB – San Francisco were completed under the MPF Program, which entitles the Bank to a credit enhancement fee collected from FHLB – San Francisco on a monthly basis and is described in Note 1 under PBM activities.

The following table summarizes the Corporation’s MSA for years ended June 30, 2017 and 2016 :



	Year Ended June 30,
(Dollars In Thousands)	2017			2016

MSA balance, beginning of fiscal year	$	795		$	644
Additions	269			394
Amortization	(167		)	(243		)
MSA balance, end of fiscal year, before allowance	897			795
Allowance	(158		)	(168		)
MSA balance, end of fiscal year	$	739		$	627

Fair value, beginning of fiscal year	$	627		$	470
Fair value, end of fiscal year	$	811		$	627

Allowance, beginning of fiscal year	$	168		$	248
Impairment recoveries	(10		)	(80		)
Allowance, end of fiscal year	$	158		$	168

Key Assumptions:
Weighted-average discount rate	9.11		%	9.07		%
Weighted-average prepayment speed	17.02		%	19.68		%

The following table summarizes the estimated future amortization of MSA for the next five years and thereafter:



	Amount
Year Ending June 30,	(In Thousands)

2018	$	188
2019	158
2020	127
2021	100
2022	80
Thereafter	244
Total estimated amortization expense	$	897

The following table represents the hypothetical effect on the fair value of the Corporation’s MSA using an unfavorable shock analysis of certain key valuation assumptions as of June 30, 2017 and 2016 . This analysis is presented for hypothetical purposes only. As the amounts indicate, changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.



	Year Ended June 30,
(Dollars In Thousands)	2017			2016
MSA net carrying value	$	739		$	627

CPR assumption (weighted-average)	17.02		%	19.68		%
Impact on fair value with 10% adverse change in prepayment speed	$	(28	)	$	(29	)
Impact on fair value with 20% adverse change in prepayment speed	$	(55	)	$	(55	)

Discount rate assumption (weighted-average)	9.11		%	9.07		%
Impact on fair value with 10% adverse change in discount rate	$	(33	)	$	(21	)
Impact on fair value with 20% adverse change in discount rate	$	(64	)	$	(41	)

The Corporation has also recorded interest-only strips with a fair value of $31,000, comprised of gross unrealized gains of $31,000 and no unamortized cost at June 30, 2017. This compares to interest-only strips at June 30, 2016 with a fair value of $47,000, comprised of gross unrealized gains of $47,000 and no unamortized cost. There were no additions to interest-only strips during fiscal 2017, 2016 or 2015. Total amortization of the interest-only strips during the years ended June 30, 2017, 2016 and 2015 was $0, $1,000 and $1,000, respectively.

Loans sold consisted of the following for the years indicated:



(In Thousands)	Year Ended June 30,
(In Thousands)	2017		2016		2015
Loans sold:
Servicing – released	$	1,935,349	$	1,948,423	$	2,392,251
Servicing – retained	38,250		45,798		17,663
Total loans sold	$	1,973,599	$	1,994,221	$	2,409,914

During the years ended June 30, 2017, 2016 and 2015, the Corporation sold 12%, 14% and 13%, respectively, of its loans originated for sale to a single investor, other than Freddie Mac or Fannie Mae. If the Corporation is unable to sell loans to this investor, find alternative investors, or change its loan programs to meet investor guidelines, it may have a significant negative impact on the Corporation’s results of operations.

Loans held for sale, at fair value, at June 30, 2017 and 2016 consisted of the following:



(In Thousands)	June 30,
(In Thousands)	2017		2016
Fixed rate	$	115,703	$	186,203
Adjustable rate	845		3,255
Total loans held for sale, at fair value	$	116,548	$	189,458