Bank of America Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Mortgage Servicing Rights

Mortgage Servicing Rights

6 Months Ended

Jun. 30, 2011

Mortgage Servicing Rights [Abstract]

NOTE 19 – 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. 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 six months ended June 30, 2011 and 2010. Commercial and residential reverse MSRs, which are carried at the lower of cost or market value and accounted for using the amortization method, totaled $270 million and $278 million at June 30, 2011 and December 31, 2010, and are not included in the tables in this Note.


	Three Months Ended						Six Months Ended
	June 30						June 30
(Dollars in millions)	2011			2010			2011			2010

Balance, beginning of period	$	15,282		$	18,842		$	14,900		$	19,465
Net additions		176			882			1,017			2,013
Impact of customer payments ⁽¹⁾		(639	)		(981	)		(1,345	)		(2,037	)
Impact of changes in interest rates and other market factors⁽²⁾		(1,094	)		(3,817	)		(385	)		(4,000	)
Model and other cash flow assumption changes: ⁽³⁾
Projected cash flows, primarily due to increases in cost to service loans		(1,501	)		(524	)		(2,029	)		(1,076	)
Impact of changes in the Home Price Index		212			(34	)		434			(34	)
Impact of changes to the prepayment model		303			385			126			427
Other model changes		(367	)		(8	)		(346	)		(13	)

Balance, June 30	$	12,372		$	14,745		$	12,372		$	14,745

Mortgage loans serviced for investors (in billions)	$	1,578		$	1,706		$	1,578		$	1,706

⁽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 market 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 option-adjusted spread (OAS) valuation approach to determine the fair value of MSRs which factors in prepayment risk. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. The key economic assumptions used in determining the fair value of MSRs at June 30, 2011 and December 31, 2010 are presented below.

June 30, 2011

December 31, 2010

(Dollars in millions)

Fixed

Adjustable

Fixed

Adjustable

Weighted-average OAS

2.28

2.21

2.21

3.25

Weighted-average life, in years

4.86

2.47

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.


	June 30, 2011
	Change in
	Weighted-average Lives
							Change in
(Dollars in millions)	Fixed			Adjustable			Fair Value

Prepayment rates
Impact of 10% decrease		0.30	years		0.17	years	$	800
Impact of 20% decrease		0.65			0.37			1,696

Impact of 10% increase		(0.27	)		(0.15	)		(719	)
Impact of 20% increase		(0.52	)		(0.28	)		(1,370	)

OAS level
Impact of 100 bps decrease		n/a			n/a		$	740
Impact of 200 bps decrease		n/a			n/a			1,551

Impact of 100 bps increase		n/a			n/a			(677	)
Impact of 200 bps increase		n/a			n/a			(1,298	)

n/a = not applicable

- Definition

Tabular disclosure of the activity in the balance of servicing assets (including a description of where changes in fair value are reported in the statement of income for each period for which results of operations are presented), including but not limited to, the following: beginning and ending balances, additions (for instance, through purchases of servicing assets), disposals, changes in fair value during the period resulting from changes in inputs or assumptions used in the valuation model, other changes in fair value along with a description of those changes, and other changes that affect the balance along with a description of those changes.

+ References + Details