| Mortgage Servicing Rights |
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NOTE 18 – 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. 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.
The table below presents activity for residential first-lien MSRs for the three and nine months ended September 30, 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 $155 million and $132 million at September 30, 2012 and December 31, 2011, and are not included in the tables in this Note.
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Rollforward of Mortgage Servicing Rights |
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Three Months Ended
September 30 |
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Nine Months Ended
September 30 |
(Dollars in millions) |
2012 |
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2011 |
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2012 |
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2011 |
Balance, beginning of period |
$ |
5,708 |
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$ |
12,372 |
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$ |
7,378 |
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$ |
14,900 |
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Additions |
100 |
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251 |
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268 |
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1,502 |
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Sales |
(15 |
) |
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(218 |
) |
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(113 |
) |
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(452 |
) |
Impact of customer payments (1)
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(346 |
) |
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(665 |
) |
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(1,149 |
) |
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(2,010 |
) |
Impact of changes in interest rates and other market factors (2)
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(280 |
) |
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(4,471 |
) |
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(1,022 |
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(4,856 |
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Model and other cash flow assumption changes: (3)
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Projected cash flows, primarily due to (increases) decreases in costs to service loans (4)
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113 |
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(243 |
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506 |
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(2,272 |
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Impact of changes in the Home Price Index |
(62 |
) |
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— |
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(42 |
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434 |
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Impact of changes to the prepayment model |
— |
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1,470 |
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342 |
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1,596 |
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Other model changes |
(131 |
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(616 |
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(1,081 |
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(962 |
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Balance, September 30 |
$ |
5,087 |
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$ |
7,880 |
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$ |
5,087 |
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$ |
7,880 |
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Mortgage loans serviced for investors (in billions) |
$ |
1,142 |
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$ |
1,512 |
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$ |
1,142 |
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$ |
1,512 |
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(1) |
Represents the change in the market value of the MSR asset due to the impact of customer payments received during the period. |
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(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. |
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(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. |
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(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 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. During the nine months ended September 30, 2012, the Corporation refined the OAS assumptions used in the MSR valuation model to reflect returns commensurate with market participants' view, considering current and pending capital rules, including the impact of Basel 3, and other factors. The increases in OAS levels resulted in a decrease in MSR value, which is included in the Other model changes line item in the table above.
The significant economic assumptions used in determining the fair value of MSRs at September 30, 2012 and December 31, 2011 are presented below.
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Significant Economic Assumptions |
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September 30, 2012 |
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December 31, 2011 |
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Fixed |
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Adjustable |
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Fixed |
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Adjustable |
Weighted-average OAS |
5.80 |
% |
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8.79 |
% |
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2.80 |
% |
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5.61 |
% |
Weighted-average life, in years |
3.52 |
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2.01 |
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3.78 |
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2.10 |
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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.
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Sensitivity Impacts |
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September 30, 2012 |
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Change in Weighted-average Lives |
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(Dollars in millions) |
Fixed |
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Adjustable |
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Change in
Fair Value
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Prepayment rates |
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Impact of 10% decrease |
0.31 |
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years |
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0.19 |
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years |
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$ |
496 |
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Impact of 20% decrease |
0.66 |
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0.42 |
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1,063 |
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Impact of 10% increase |
(0.27 |
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(0.17 |
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(438 |
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Impact of 20% increase |
(0.50 |
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(0.31 |
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(826 |
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OAS level |
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Impact of 100 bps decrease |
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$ |
230 |
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Impact of 200 bps decrease |
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479 |
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Impact of 100 bps increase |
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(214 |
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Impact of 200 bps increase |
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(413 |
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