Annual report pursuant to Section 13 and 15(d)

Mortgage Servicing Rights

v2.4.0.6
Mortgage Servicing Rights
 12 Months Ended
Dec. 31, 2011
Transfers and Servicing [Abstract]  
Mortgage Servicing Rights
Mortgage Servicing Rights
The Corporation accounts for consumer MSRs at fair value with changes in fair value recorded in the Consolidated Statement of Income in mortgage banking income (loss). The Corporation economically hedges these MSRs with certain derivatives and securities including MBS and U.S. Treasuries. The securities that economically hedge the MSRs are classified in other assets with changes in the fair value of the securities and the related interest income recorded in mortgage banking income (loss).
The table below presents activity for residential first-lien MSRs for 2011 and 2010. Commercial and residential reverse MSRs, which are carried at the lower of carrying or market value and accounted for using the amortization method, totaled $132 million and $277 million at December 31, 2011 and 2010, and are not included in the tables in this Note.
 
 
 
 
(Dollars in millions)
2011
 
2010
Balance, January 1
$
14,900

 
$
19,465

Additions
1,656

 
3,626

Sales
(896
)
 
(110
)
Impact of customer payments (1)
(2,621
)
 
(3,760
)
Impact of changes in interest rates and other market factors (2)
(4,890
)
 
(3,224
)
Model and other cash flow assumption changes: (3)
 

 
 

Projected cash flows, primarily due to increases in cost to service loans
(2,306
)
 
(3,161
)
Impact of changes in the Home Price Index
428

 
937

Impact of changes in the prepayment model
1,818

 
1,298

Other model changes
(711
)
 
(171
)
Balance, December 31
$
7,378

 
$
14,900

Mortgage loans serviced for investors (in billions)
$
1,379

 
$
1,628

(1) 
Represents the change in the market value of the MSR asset due to the impact of customer payments received during the period.
(2) 
These amounts reflect changes in the modeled MSR fair value largely due to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve.
(3) 
These amounts reflect periodic adjustments to the valuation model as well as changes in certain cash flow assumptions such as costs to service and ancillary income per loan.

The Corporation uses an OAS valuation approach which factors in prepayment risk to determine the fair value of MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. The significant economic assumptions used in determining the fair value of MSRs at December 31, 2011 and 2010 are presented below.
 
 
 
 
 
 
 
 
Significant Economic Assumptions
 
 
 
 
 
 
 
 
 
December 31
 
2011
 
2010
(Dollars in millions)
Fixed
 
Adjustable
 
Fixed
 
Adjustable
Weighted-average OAS
2.80
%
 
5.61
%
 
2.17
%
 
5.12
%
Weighted-average life, in years
3.78

 
2.10

 
4.85

 
2.29



The table below presents the sensitivity of the weighted-average lives and fair value of MSRs to changes in modeled assumptions. These sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSRs that continue to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. The below sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk.
 
 
 
 
 
 
 
 
Sensitivity Impacts
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Change in
Weighted-average Lives
 
 
(Dollars in millions)
Fixed
 
Adjustable
 
Change in Fair Value
Prepayment rates
 

 
 
 

 
 
 

Impact of 10% decrease
0.29

years
 
0.14

years
 
$
639

Impact of 20% decrease
0.63

 
 
0.31

 
 
1,375

Impact of 10% increase
(0.25
)
 
 
(0.12
)
 
 
(561
)
Impact of 20% increase
(0.48
)
 
 
(0.23
)
 
 
(1,056
)
OAS level
 

 
 
 

 
 
 

Impact of 100 bps decrease
n/a

 
 
n/a

 
 
$
375

Impact of 200 bps decrease
n/a

 
 
n/a

 
 
782

Impact of 100 bps increase
n/a

 
 
n/a

 
 
(345
)
Impact of 200 bps increase
n/a

 
 
n/a

 
 
(664
)
n/a = not applicable