Net Gains on Sales of Loans
Net gains on sales of loans include realized and unrealized gains and losses on loans, the initial fair value of the capitalized servicing rights upon loan sales with servicing retained, as well as the changes in fair value of our IRLCs and other freestanding derivatives. The amount of net gains on sales of loans is a function of the volume and margin of our originations activity and is impacted by fluctuations in interest rates. A substantial portion of our gains on sales of loans is recognized at the time we commit to originate or purchase a loan at specified terms, as we recognize the value of the IRLC at the time of commitment. The fair value of the IRLC includes our estimate of the fair value of the servicing right we expect to retain upon sale of the loan. We recognize loan origination costs as incurred, which typically align with the date of loan funding for consumer originations and the date of loan purchase for correspondent lending. These expenses are primarily included in general and administrative expenses and salaries and benefits on the consolidated statements of comprehensive income (loss). In addition, we record a provision for losses relating to representations and warranties made as part of the loan sale transaction at the time the loan is sold.
The volatility in the gain on sale of loans spread is attributable to market pricing, which changes with demand, channel mix, and the general level of interest rates. While many factors may affect consumer demand for mortgages, generally, pricing competition on mortgage loans is lower in periods of low or declining interest rates, as consumer demand is greater. This provides opportunities for originators to increase volume and earn wider margins. Conversely, pricing competition increases when interest rates rise as consumer demand lessens. This reduces overall originations volume and may lead originators to reduce margins. The level and direction of interest rates are not the sole determinant of consumer demand for mortgages. Other factors such as secondary market conditions, home prices, credit spreads or legislative activity may impact consumer demand more significantly than interest rates in any given period.
Net gains on sales of loans for our Originations segment consist of the following (dollars in thousands):
For the Period From February 10, 2018 Through December 31, 2018
For the Period From January 1, 2018 Through February 9, 2018
For the Year Ended December 31, 2017
Realized gains (losses) on sales of loans (1)
Change in unrealized gains (losses) on loans held for sale (1)
Losses on interest rate lock commitments (1)(2)
Gains (losses) on forward sales commitments (1)(2)
Gains (losses) on MBS purchase commitments (1)(2)
Capitalized servicing rights (3)
Provision for repurchases
Net gains on sales of loans
Gains or losses on interest rate lock commitments, forward sales commitments, and MBS purchase commitments are principally offset by gains or losses included in realized gains (losses) on sales of loans or change in unrealized gains (losses) on loans held for sale.
Realized gains (losses) on freestanding derivatives were $20.4 million, $7.9 million and $(8.8) million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
Includes revenues generated in connection with transfers of MSR to NRM of $44.1 million, $3.8 million and $62.3 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. Refer to Note 4 to the Consolidated Financial Statements for additional information regarding transactions with NRM.
The decrease in net gains on sales of loans of $93.7 million in 2018 as compared to 2017 was primarily due to a lower day one margin due to a product mix shift towards lower margin correspondent and wholesale channels combined with pricing decreases implemented in 2018, as well as an overall lower volume of locked loans. This decrease was offset partially by an increase resulting from higher pull-through rates in the consumer channel. In addition, net gains on sales of loans included a decrease in interest income on loans resulting from lower average loan balances, partially offset by higher average interest rates.
The years ended December 31, 2018 and 2017 included the benefit of higher margins from HARP, which expired on December 31, 2018. HARP was a federal program of the U.S. that helped homeowners refinance their mortgage.