Quarterly report pursuant to Section 13 or 15(d)

Loan Sales and Securitizations

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Loan Sales and Securitizations
9 Months Ended
Sep. 30, 2011
Loan Sales and Securitizations [Abstract]  
LOAN SALES AND SECURITIZATIONS

6. Loan sales and Securitizations

 

Residential Mortgage Loans

 

The following table summarizes activity relating to residential mortgage loans sold with servicing retained for the three-month and nine-month periods ended September 30, 2011 and 2010:

 

      Three Months Ended     Nine Months Ended
      September 30,     September 30,
(dollar amounts in thousands)   2011     2010     2011     2010
Residential mortgage loans sold with servicing retained $ 515,179   $ 924,494   $ 2,264,697   $ 2,463,509
Pretax gains resulting from above loan sales (1)   12,737     21,842     57,982     55,266
                         
(1) Recorded in other noninterest income.

A MSR is established only when the servicing is contractually separated from the underlying mortgage loans by sale or securitization of the loans with servicing rights retained. At the time of initial capitalization, MSRs are recorded using either the fair value method or the amortization method. MSRs are included in accrued income and other assets. Any increase or decrease in the fair value of MSRs carried under the fair value method, as well as amortization or impairment of MSRs recorded using the amortization method, is recorded as an increase or decrease in mortgage banking income, which is included in noninterest income. When the fair value method is used, the MSR asset is established at its fair value at initial recognition using assumptions consistent with assumptions used to estimate the fair value of existing MSRs carried at fair value in the portfolio.

 

The following tables summarize the changes in MSRs recorded using either the fair value method or the amortization method for the three-month and nine-month periods ended September 30, 2011 and 2010:

      Three Months Ended     Nine Months Ended
Fair Value Method:   September 30,     September 30,
(dollar amounts in thousands)   2011     2010     2011     2010
Fair value, beginning of period $ 104,997   $ 132,405   $ 125,679   $ 176,426
Change in fair value during the period due to:                      
  Time decay (1)   (1,222)     (1,088)     (3,987)     (4,295)
  Payoffs (2)   (4,614)     (9,158)     (15,013)     (22,835)
  Changes in valuation inputs or assumptions (3)   (25,337)     (10,004)     (32,855)     (37,141)
Fair value, end of period: $ 73,824   $ 112,155   $ 73,824   $ 112,155
                         
(1) Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and partial loan paydowns.
(2) Represents decrease in value associated with loans that paid off during the period.
(3) Represents change in value resulting primarily from market-driven changes in interest rates and prepayment spreads.
                         
      Three Months Ended     Nine Months Ended
Amortization Method:   September 30,     September 30,
(dollar amounts in thousands)   2011     2010     2011     2010
Carrying value, beginning of period $ 84,742   $ 46,733   $ 70,516   $ 38,165
New servicing assets created   4,572     7,506     24,549     24,247
Impairment charge   (14,057)     (2,043)     (14,057)     (6,899)
Amortization and other   (3,804)     (2,757)     (9,555)     (6,074)
Carrying value, end of period $ 71,453   $ 49,439   $ 71,453   $ 49,439
Fair value, end of period $ 71,467   $ 50,832   $ 71,467   $ 50,832

MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs occur, the precise terms and conditions are typically not readily available. Therefore, the fair value of MSRs is estimated using a discounted future cash flow model. The model considers portfolio characteristics, contractually specified servicing fees and assumptions related to prepayments, delinquency rates, late charges, other ancillary revenues, costs to service, and other economic factors. Changes in the assumptions used may have a significant impact on the valuation of MSRs.

 

A summary of key assumptions and the sensitivity of the MSR value at September 30, 2011, to changes in these assumptions follows:

 

            Decline in fair value due to
            10%     20%
            adverse     adverse
(dollar amounts in thousands)   Actual     change     change
Constant prepayment rate   18.64 %   $ (4,729)   $ (9,388)
Spread over forward interest rate swap rates   658 bps     (1,741)     (3,482)

MSR values are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly impacted by the level of prepayments. Huntington hedges the fair value portfolio of MSRs against changes in value attributable to changes in interest rates through a combination of derivative instruments and trading securities.

 

Total servicing fees included in mortgage banking income amounted to $12.1 million and $12.1 million for the three-month periods ended September 30, 2011 and 2010, respectively. For the nine-month periods ending September 30, 2011 and 2010, servicing fees totaled $37.1 million and $36.6 million, respectively.

Automobile Loans and Leases

During the 2011 third quarter, Huntington transferred automobile loans totaling $1.0 billion to a trust in a securitization transaction and received $1.0 billion of net proceeds. The securitization qualified for sale accounting. As a result of this transaction, Huntington recognized a $15.5 million gain which is reflected in other noninterest income on the Condensed Consolidated Statement of Income and recorded a $16.0 million servicing asset which is reflected in accrued income and other assets on the Condensed Consolidated Balance Sheet.

 

Automobile loan servicing rights are accounted for using the amortization method. A servicing asset is established at fair value at the time of the sale. The servicing asset is then amortized against servicing income. Impairment, if any, is recognized when carrying value exceeds the fair value as determined by calculating the present value of expected net future cash flows. The primary risk characteristic for measuring servicing assets is payoff rates of the underlying loan pools. Valuation calculations rely on the predicted payoff assumption and, if actual payoff is quicker than expected, then future value would be impaired.

 

Changes in the carrying value of automobile loan servicing rights for the three-month periods ended September 30, 2011, and 2010, and the fair value at the end of each period were as follows:

 

      Three Months Ended     Nine Months Ended
      September 30,     September 30,
(dollar amounts in thousands)   2011     2010     2011     2010
Carrying value, beginning of period $ 49   $ 373   $ 97   $ 12,912
New servicing assets created   16,039     ---     16,039     ---
Amortization and other (1)   (743)     (228)     (791)     (12,767)
Carrying value, end of period $ 15,345   $ 145   $ 15,345   $ 145
                         
Fair value, end of period $ 16,039   $ 387   $ 16,039   $ 387
                         
(1) The nine months ended September 30, 2010, included a $12.4 million reduction related to the consolidation of a VIE in the 2010 first quarter.

Huntington has retained servicing responsibilities on sold automobile loans and receives annual servicing fees and other ancillary fees on the outstanding loan balances. Servicing income, net of amortization of capitalized servicing assets, amounted to $0.3 million and $0.5 million for the three-month periods ending September 30, 2011, and 2010, respectively. For the nine-month periods ended September 30, 2011, and 2010, servicing income, net of amortization of capitalized servicing assets, was $1.0 million and $2.1 million, respectively.