Sales of Receivables and Servicing Rights

9 Months Ended

Sep. 30, 2023

Transfers and Servicing [Abstract]

Sales of Receivables and Servicing Rights

Sales of Receivables and Servicing Rights

Residential Mortgage Loan Sales

The Bancorp sold fixed and adjustable-rate residential mortgage loans during the three and nine months ended September 30, 2023 and 2022. In those sales, the Bancorp obtained servicing responsibilities and provided certain standard representations and warranties; however, the investors have no recourse to the Bancorp’s other assets for failure of debtors to pay when due. The Bancorp receives servicing fees based on a percentage of the outstanding balance. The Bancorp identifies classes of servicing assets based on financial asset type and interest rates.

Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net revenue in the Condensed Consolidated Statements of Income, is as follows:

	For the three months ended September 30,			For the nine months ended September 30,
($ in millions)	2023		2022	2023	2022
Residential mortgage loan sales(a)	$	1,374	3,943	3,882	10,445
Origination fees and gains on loan sales	19		24	59	73
Gross mortgage servicing fees	79		81	241	230

(a)Represents the unpaid principal balance at the time of the sale.

Servicing Rights

The Bancorp measures all of its mortgage servicing rights at fair value with changes in fair value reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income.

The following table presents changes in the servicing rights related to residential mortgage loans for the nine months ended September 30:

($ in millions)	2023		2022
Balance, beginning of period	$	1,746	1,121
Servicing rights originated	57		186
Servicing rights purchased	25		208
Changes in fair value:
Due to changes in inputs or assumptions(a)	107		358
Other changes in fair value(b)	(113)		(141)
Balance, end of period	$	1,822	1,732

(a)Primarily reflects changes in prepayment speed and OAS assumptions which are updated based on market interest rates.

(b)Primarily reflects changes due to realized cash flows and the passage of time.

The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the value of the MSR portfolio. This strategy may include the purchase of free-standing derivatives and various available-for-sale debt and trading debt securities. The interest income, mark-to-market adjustments and gain or loss from sale activities associated with these portfolios are expected to economically hedge a portion of the change in value of the MSR portfolio caused by fluctuating OAS, earnings rates and prepayment speeds. The fair value of the servicing asset is based on the present value of expected future cash flows.

The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy:

	For the three months ended September 30,			For the nine months ended September 30,
($ in millions)	2023		2022	2023	2022
Securities losses, net – non-qualifying hedges on mortgage servicing rights	$	—	(1)	—	(2)
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio(a)	(75)		(84)	(110)	(368)
MSR fair value adjustment due to changes in inputs or assumptions(a)	73		83	107	358

(a)Included in mortgage banking net revenue in the Condensed Consolidated Statements of Income.

The key economic assumptions used in measuring the servicing rights related to residential mortgage loans that continued to be held by the Bancorp at the date of sale, securitization or purchase resulting from transactions completed during the three months ended September 30, 2023 and 2022 were as follows:

	September 30, 2023				September 30, 2022
	Weighted- Average Life (in years)	Prepayment Speed (annual)		OAS (bps)	Weighted- Average Life (in years)	Prepayment Speed (annual)		OAS (bps)
Fixed-rate	6.6	12.2	%	575	6.9	11.3	%	760
Adjustable-rate	—	—		—	2.2	35.1		803

At September 30, 2023 and December 31, 2022, the Bancorp serviced $101.9 billion and $103.2 billion, respectively, of residential mortgage loans for other investors. The value of MSRs that continue to be held by the Bancorp is subject to credit, prepayment and interest rate risks on the sold financial assets. The weighted-average coupon of the MSR portfolio was 3.69% and 3.59% at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in prepayment speed assumptions and immediate 10% and 20% adverse changes in OAS for servicing rights related to residential mortgage loans are as follows:

($ in millions)(a)				Prepayment Speed Assumption						OAS Assumption
	Fair Value		Weighted- Average Life (in years)			Impact of Adverse Change on Fair Value				OAS (bps)	Impact of Adverse Change on Fair Value
				Rate		10%		20%	50%		10%		20%
Fixed-rate	$	1,817	9.1	5.0	%	$	(39)	(74)	(166)	582	$	(45)	(88)
Adjustable-rate	5		5.7	20.3		(1)		(1)	(2)	1,204	—		—

(a)The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial.

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on these variations in the assumptions typically cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The Bancorp believes that variations of these levels are reasonably possible; however, there is the potential that adverse changes in key assumptions could be even greater. Also, in the previous table, the effect of a variation in a particular assumption on the fair value of the interests that continue to be held by the Bancorp is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which might magnify or counteract these sensitivities.