Note 4: 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:


	At June 30,
(In Thousands)	2020		2019
Loans serviced for Freddie Mac	$	14,210	$	18,613
Loans serviced for Fannie Mae		64,910		89,910
Loans serviced for FHLB – San Francisco		7,385		9,724
Loans serviced for other investors		—		1,989
Total loans serviced for others	$	86,505	$	120,236

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, 2020 and 2019, the Corporation held borrowers’ escrow balances related to loans serviced for others of $377,000 and $539,000, respectively.

In estimating fair values of the MSA at June 30, 2020 and 2019, the Corporation used a weighted-average constant prepayment rate (“CPR”) of 26.07% and 23.86%, respectively, and a weighted-average discount rate of 9.11% at both dates. 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 $673,000 and a fair value of $382,000 at June 30, 2020. This compares to the MSA at June 30, 2019 which had a carrying value of $925,000 and a fair value of $627,000. An allowance may be recorded to adjust the carrying value of the MSA to the lower of cost or fair value. As of June 30, 2020, a total allowance of $291,000 was required for MSA, compared to a total allowance of $298,000 for MSA as of June 30, 2019. Total additions to the MSA during the years ended June 30, 2020 and 2019 were $0 and $52,000, respectively. Total amortization of the MSA during the years ended June 30, 2020 and 2019 was $252,000 and $125,000, 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 Loans originated and held for sale.

The following table summarizes the Corporation’s MSA for years ended June 30, 2020 and 2019:


	Year Ended June 30,
(Dollars In Thousands)	2020			2019

MSA balance, beginning of fiscal year	$	925		$	998
Additions		—			52
Amortization		(252)			(125)
MSA balance, end of fiscal year, before allowance		673			925
Allowance		(291)			(298)
MSA balance, end of fiscal year	$	382		$	627

Fair value, beginning of fiscal year	$	627		$	1,015
Fair value, end of fiscal year	$	382		$	627

Allowance, beginning of fiscal year	$	298		$	82
Impairment (recovery) provision		(7)			216
Allowance, end of fiscal year	$	291		$	298

Key Assumptions:
Weighted-average discount rate		9.11	%		9.11	%
Weighted-average prepayment speed		26.07	%		23.86	%

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


	Amount
Year Ending June 30,	(In Thousands)

2021	$	129
2022		103
2023		74
2024		51
2025		35
Thereafter		281
Total estimated amortization expense	$	673

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, 2020 and 2019. 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)	2020			2019
MSA net carrying value	$	382		$	627

CPR assumption (weighted-average)		26.07	%		23.86	%
Impact on fair value with 10% adverse change in prepayment speed	$	(19)		$	(30)
Impact on fair value with 20% adverse change in prepayment speed	$	(35)		$	(58)

Discount rate assumption (weighted-average)		9.11	%		9.11	%
Impact on fair value with 10% adverse change in discount rate	$	(12)		$	(20)
Impact on fair value with 20% adverse change in discount rate	$	(23)		$	(40)

Loans sold consisted of the following for the years indicated:


	Year Ended June 30,
(In Thousands)	2020		2019
Loans sold:
Servicing – released	$	—	$	551,754
Servicing – retained		—		7,196
Total loans sold	$	—	$	558,950

Consistent with the Corporation’s announcement on February 4, 2019 to scale back operations related to the origination of saleable single-family mortgage loans and improve on its efforts to increase the volume of portfolio single-family mortgage loan originations, there were no loans sold in fiscal 2020, as compared to $559.0 million in fiscal 2019; and there were no outstanding loans held for sale at June 30, 2020 and June 30, 2019.