Annual report pursuant to Section 13 and 15(d)

Mortgage Servicing Rights

v2.4.0.6
Mortgage Servicing Rights
 12 Months Ended
Dec. 31, 2012
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 Corporation’s Consolidated Statement of Income in mortgage banking income (loss). The Corporation manages the risk in these MSRs with securities including MBS and U.S. Treasuries, as well as certain derivatives such as options and interest rate swaps, which are not designated as accounting hedges. The securities used to manage the risk in 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 2012 and 2011. Commercial and residential reverse MSRs, which are carried at the lower of cost or market value and accounted for using the amortization method, totaled $135 million and $132 million at December 31, 2012 and 2011, and are not included in the tables in this Note.
 
 
 
 
Rollforward of Mortgage Servicing Rights
 
 
 
 
(Dollars in millions)
2012
 
2011
Balance, January 1
$
7,378

 
$
14,900

Additions
374

 
1,656

Sales
(122
)
 
(896
)
Impact of customer payments (1)
(1,484
)
 
(2,621
)
Impact of changes in interest rates and other market factors (2)
(867
)
 
(4,890
)
Model and other cash flow assumption changes: (3)
 

 
 

Projected cash flows, primarily due to (increases) decreases in costs to service loans (4)
443

 
(2,306
)
Impact of changes in the Home Price Index
(112
)
 
428

Impact of changes to the prepayment model
435

 
1,818

Other model changes
(329
)
 
(711
)
Balance, December 31
$
5,716

 
$
7,378

Mortgage loans serviced for investors (in billions)
$
1,045

 
$
1,379

(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 the changes in modeled MSR fair value primarily 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 cost to service and ancillary income per loan.
(4) 
As part of the MSR fair value estimation process, the Corporation increased its estimated cost to service during 2011 due to higher costs expected from foreclosure delays and procedures, the implementation of various loan modification programs, and compliance with new banking regulations. During 2012, the Corporation has continued to refine its estimates of cost to service and ancillary income to be consistent with market participants’ view which resulted in a decrease to the estimated cost to service.
The Corporation primarily 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. In late 2012, the Corporation solicited and received multiple proposals from independent third parties for the purchase of a portion of the MSRs. The Corporation used the prices in the proposals, as adjusted to exclude the portion of the pricing that was not specific to the MSRs, as a third-party pricing source in the valuation of the MSRs. Use of this pricing source had the effect of increasing the fair value of the MSRs by $342 million, which is included in Other model changes in the table above, to bring the fair value of the MSRs to an amount consistent with the third-party price discovery.
The significant economic assumptions used in determining the fair value of MSRs at December 31, 2012 and 2011 are presented below.
 
 
 
 
 
 
 
 
Significant Economic Assumptions
 
 
 
 
 
 
 
 
 
December 31
 
2012
 
2011
 
Fixed
 
Adjustable
 
Fixed
 
Adjustable
Weighted-average OAS
4.00
%
 
6.63
%
 
2.80
%
 
5.61
%
Weighted-average life, in years
3.65

 
2.10

 
3.78

 
2.10


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, 2012
 
Change in
Weighted-average Lives
 
 
(Dollars in millions)
Fixed
 
Adjustable
 
Change in Fair Value
Prepayment rates
 

 
 
 

 
 
 

Impact of 10% decrease
0.31

years
 
0.20

years
 
$
510

Impact of 20% decrease
0.67

 
 
0.43

 
 
1,094

Impact of 10% increase
(0.27
)
 
 
(0.17
)
 
 
(450
)
Impact of 20% increase
(0.51
)
 
 
(0.32
)
 
 
(849
)
OAS level
 

 
 
 

 
 
 

Impact of 100 bps decrease
 
 
 
 
 
 
$
256

Impact of 200 bps decrease
 
 
 
 
 
 
535

Impact of 100 bps increase
 
 
 
 
 
 
(237
)
Impact of 200 bps increase
 
 
 
 
 
 
(455
)