Sales of Residential Mortgage Receivables and Mortgage Servicing Rights

6 Months Ended

Jun. 30, 2012

Sales of Residential Mortgage Receivables and Mortgage Servicing Rights

9. Sales of Residential Mortgage Receivables and Mortgage Servicing Rights

The Bancorp sold fixed and adjustable rate residential mortgage loans during the three andsix months ended June 30, 2012 and 2011. In those sales, the Bancorp obtained servicing responsibilities and the investors have no recourse to the Bancorp's other assets for failure of debtors to pay when due. The Bancorp receives annual 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		For the six months
		ended June 30,		ended June 30,
($ in millions)		2012	2011	2012	2011
Residential mortgage loan sales	$	4,709	2,727	11,648	6,703
Origination fees and gains on loan sales		183	64	357	126
Servicing fees		63	58	124	116

Servicing Assets

The following table presents changes in the servicing assets related to residential mortgage loans for the six months ended June 30:

($ in millions)		2012	2011
Carrying amount as of the beginning of the period	$	1,239	1,138
Servicing obligations that result from the transfer of residential mortgage loans		190	105
Amortization		(86)	(53)
Carrying amount before valuation allowance		1,343	1,190
Valuation allowance for servicing assets:
Beginning balance		(558)	(316)
Servicing impairment		(49)	(27)
Ending balance		(607)	(343)
Carrying amount as of the end of the period	$	736	847

Temporary impairment or impairment recovery, affected through a change in the MSR valuation allowance, is captured as a component of mortgage banking net revenue in the Condensed Consolidated Statements of Income. 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 includes the purchase of free-standing derivatives and various available-for-sale 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 discount rates, 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 displays the beginning and ending fair value for the six months ended June 30:

($ in millions)		2012	2011
Fixed rate residential mortgage loans:
Beginning balance	$	649	791
Ending balance		702	813
Adjustable rate residential mortgage loans:
Beginning balance		32	31
Ending balance		34	34

The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy, which is included in the Condensed Consolidated Statements of Income:

		For the three months		For the six months
		ended June 30,		ended June 30,
($ in millions)		2012	2011	2012	2011
Securities gains, net - non-qualifying hedges on MSRs	$	-	-	-	5
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio (Mortgage banking net revenue)		38	129	42	102
Provision for MSR impairment (Mortgage banking net revenue)		(60)	(64)	(49)	(27)

As of June 30, 2012 and 2011, the key economic assumptions used in measuring the interests that continued to be held by the Bancorp at the date of sale or securitization resulting from transactions completed during the three months ended:

		June 30, 2012						June 30, 2011
	Rate	Weighted-Average Life (in years)	Prepayment Speed (annual)		Discount Rate (annual)		Weighted-Average Default rate	Weighted-Average Life (in years)	Prepayment Speed (annual)		Discount Rate (annual)		Weighted-Average Default rate
Residential mortgage loans:
Servicing assets	Fixed	6.9	9.1	%	10.4	%	N/A	6.6	11.0	%	10.5	%	N/A
Servicing assets	Adjustable	3.7	22.2		11.4		N/A	3.7	22.4		11.5		N/A

Based on historical credit experience, expected credit losses for residential mortgage loan servicing assets have been deemed immaterial, as the Bancorp sold the majority of the underlying loans without recourse. At June 30, 2012, December 31, 2011 and June 30, 2011, the Bancorp serviced $61.6billion, $57.1billionand $56.0 billion, respectively, of residential mortgage loans for other investors. The value of interests that continue to be held by the Bancorp is subject to credit, prepayment and interest rate risks on the sold financial assets. At June 30, 2012, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in prepayment speed assumptionsandimmediate 10% and 20% adverse changes inother assumptionsare as follows:

					Prepayment						Residual Servicing
					Speed Assumption						Cash Flows
			Fair	Weighted-Average Life (in				Impact of Adverse Change on Fair Value			Discount			Impact of Adverse Change on Fair Value
($ in millions)(a)	Rate		Value	years)	Rate			10%	20%	50%	Rate			10%	20%
Residential mortgage loans:
Servicing assets	Fixed	$	702	5.1	15.2	%	$	(36)	(69)	(155)	10.6	%	$	(24)	(47)
Servicing assets	Adjustable		34	3.1	27.1			(2)	(3)	(7)	11.7			(1)	(2)

(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 thesevariations in 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 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 and increased credit losses), which might magnify or counteract these sensitivities.