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Mortgage Loan Servicing and Loans Originated for Sale

12 Months Ended

Jun. 30, 2021

Mortgage Loan Servicing and Loans Originated for Sale

Mortgage Loan Servicing and Loans Originated for Sale

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)		2021			2020
Loans serviced for Freddie Mac		$	9,658		$	14,210
Loans serviced for Fannie Mae			35,486			64,910
Loans serviced for FHLB – San Francisco			5,304			7,385
Total loans serviced for others		$	50,448		$	86,505

Mortgage servicing assets (“MSA”) are recorded when loans are sold to investors and the servicing of those loans is retained by the Bank. The 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, 2021 and 2020, the Corporation held borrowers’ escrow balances related to loans serviced for others of $182,000 and $377,000, respectively.

In estimating fair values of the MSA at June 30, 2021 and 2020, the Corporation used a weighted-average constant prepayment rate (“CPR”) of 21.82% and 26.07%, respectively, and a weighted-average discount rate of 9.10% and 9.11%, 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 $384,000 and a fair value of $208,000 at June 30, 2021. This compares to the MSA at June 30, 2020 which had a carrying value of $673,000 and a fair value of $382,000. 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, 2021, a total allowance of $176,000 was required for MSA, compared to a total allowance of $291,000 for MSA as of June 30, 2020. Total additions to the MSA during the years ended June 30, 2021 and 2020 were $2,000 and $0, respectively. Total amortization of the MSA during the years ended June 30, 2021 and 2020 was $291,000 and $252,000, respectively.

Loans sold to the FHLB – San Francisco were completed under its Mortgage Partnership Finance (“MPF”) program. Under the MPF, the FHLB – San Francisco absorbs the first four basis points of loss by establishing a first loss account and a credit scoring process is used to calculate the maximum recourse amount for the Bank. All losses above the Bank’s maximum recourse are the responsibility of the FHLB – San Francisco. The FHLB – San Francisco pays the Bank a credit enhancement fee on a monthly basis to compensate the Bank for accepting the recourse obligation. As of June 30, 2021, the Bank serviced $5.3 million of loans under this program and has established a recourse liability of $25,000 as compared to $7.4 million of loans serviced and a recourse liability of $70,000 at June 30, 2020.

The following table summarizes the Corporation’s MSA for years ended June 30, 2021 and 2020:


		Year Ended June 30,
(Dollars In Thousands)		2021			2020

MSA balance, beginning of fiscal year		$	673		$	925
Additions			2			—
Amortization			(291)			(252)
MSA balance, end of fiscal year, before allowance			384			673
Allowance			(176)			(291)
MSA balance, end of fiscal year		$	208		$	382

Fair value, beginning of fiscal year		$	382		$	627
Fair value, end of fiscal year		$	208		$	382

Allowance, beginning of fiscal year		$	291		$	298
Impairment recovery			(115)			(7)
Allowance, end of fiscal year		$	176		$	291

Key Assumptions:
Weighted-average discount rate			9.10	%		9.11	%
Weighted-average prepayment speed			21.82	%		26.07	%

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


		Amount
Year Ending June 30,		(In Thousands)

2022		$	65
2023			53
2024			40
2025			28
2026			21
Thereafter			177
Total estimated amortization expense		$	384

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, 2021 and 2020. 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)		2021			2020
MSA net carrying value		$	208		$	382

CPR assumption (weighted-average)			21.82	%		26.07	%
Impact on fair value with 10% adverse change in prepayment speed		$	(10)		$	(19)
Impact on fair value with 20% adverse change in prepayment speed		$	(18)		$	(35)

Discount rate assumption (weighted-average)			9.10	%		9.11	%
Impact on fair value with 10% adverse change in discount rate		$	(7)		$	(12)
Impact on fair value with 20% adverse change in discount rate		$	(14)		$	(23)

During fiscal 2021, there was a $147,000 single-family loan sold, as compared to no loans sold in fiscal 2020; and there were no outstanding loans held for sale at June 30, 2021 and June 30, 2020.