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NOTE 19 – Mortgage Servicing Rights |
The Corporation accounts for consumer MSRs at fair value with changes in fair value recorded in mortgage banking income in the Consolidated Statement of Income. 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.
The table below presents activity for residential first-lien MSRs for the three months ended March 31, 2013 and 2012. Commercial and residential reverse MSRs, which are carried at the lower of cost or market value and accounted for using the amortization method, totaled $120 million and $135 million at March 31, 2013 and December 31, 2012, 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
March 31 |
(Dollars in millions) |
2013 |
|
2012 |
Balance, January 1 |
$ |
5,716 |
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|
$ |
7,378 |
|
Additions |
123 |
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|
77 |
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Sales |
(183 |
) |
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— |
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Impact of customer payments (1)
|
(314 |
) |
|
(521 |
) |
Impact of changes in interest rates and other market factors (2)
|
332 |
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|
925 |
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Model and other cash flow assumption changes: (3)
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Projected cash flows, primarily due to increases in costs to service loans |
(134 |
) |
|
(273 |
) |
Impact of changes in the Home Price Index |
(79 |
) |
|
15 |
|
Impact of changes to the prepayment model |
175 |
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— |
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Other model changes |
140 |
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|
(12 |
) |
Balance, March 31 |
$ |
5,776 |
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$ |
7,589 |
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Mortgage loans serviced for investors (in billions) |
$ |
949 |
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$ |
1,313 |
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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, as well as changes in OAS and prepayment rates. |
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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. For the three months ended March 31, 2013 and 2012, included in other model changes is the effect to the MSR cash flow assumptions caused by changes in spreads between primary and secondary markets.
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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 addition to updating the valuation model for interest, discount and prepayment rates, periodic adjustments are made to recalibrate the valuation model for factors used to project cash flows. The changes to the factors capture the effect of variances related to actual versus estimated servicing proceeds. In late 2012, the Corporation solicited and received multiple proposals from independent third parties for the sale of a portion of the MSRs. In 2013, the Corporation entered into definitive agreements for the sales. The Corporation used the prices in the proposals and definitive agreements, 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.
The significant economic assumptions used in determining the fair value of MSRs at March 31, 2013 and December 31, 2012 are presented below.
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Significant Economic Assumptions |
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March 31, 2013 |
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December 31, 2012 |
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Fixed |
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Adjustable |
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Fixed |
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Adjustable |
Weighted-average OAS |
3.98 |
% |
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6.65 |
% |
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4.00 |
% |
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6.63 |
% |
Weighted-average life, in years |
4.05 |
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|
2.10 |
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3.65 |
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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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March 31, 2013 |
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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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0.21 |
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years |
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$ |
462 |
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Impact of 20% decrease |
0.67 |
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0.45 |
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|
984 |
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Impact of 10% increase |
(0.28 |
) |
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(0.18 |
) |
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|
(412 |
) |
Impact of 20% increase |
(0.52 |
) |
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(0.34 |
) |
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(781 |
) |
OAS level |
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Impact of 100 bps decrease |
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$ |
277 |
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Impact of 200 bps decrease |
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578 |
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Impact of 100 bps increase |
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(255 |
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Impact of 200 bps increase |
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(490 |
) |
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