Sales of Receivables and Mortgage Servicing Rights

3 Months Ended

Mar. 31, 2013

Sales of Receivables and Servicing Rights

9. Sales of Receivables and Servicing Rights

Automobile Loan Securitization

In March of 2013, the Bancorp recognized an immaterial loss on the securitization and sale of certain automobile loans with a carrying amount of approximately $509 million. The Bancorp utilized a securitization trust to facilitate the securitization process. The trust issued asset-backed securities in the form of notes and equity certificates, with varying levels of credit subordination and payment priority. The Bancorp does not hold any of the notes or equity certificates issued by the trust, and the investors in these securities have no credit recourse to the Bancorp's assets for failure of debtors to pay when due. As part of the sale, the Bancorp obtained servicing responsibilities and recognized a servicing asset with an initial fair value of $6 million.

Residential Mortgage Loan Sales

The Bancorp sold fixed and adjustable rate residential mortgage loans during the three months ended March 31, 2013 and 2012. 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
		ended March 31,
($ in millions)		2013	2012
Residential mortgage loan sales	$	6,888	6,939
Origination fees and gains on loan sales		169	174
Servicing fees		61	61

Servicing Assets

The following table presents changes in the servicing assets related to residential mortgage and automobile loans for the three months ended March 31:
($ in millions)		2013	2012
Carrying amount before valuation allowance as of the beginning of the period	$	1,358	1,239
Servicing rights that result from the transfer of residential mortgage loans		73	121
Servicing rights that result from the transfer of automobile loans		6	-
Amortization		(53)	(46)
Carrying amount before valuation allowance		1,384	1,314
Valuation allowance for servicing assets:
Beginning balance		(661)	(558)
Servicing recovery related to MSRs		49	11
Ending balance		(612)	(547)
Carrying amount as of the end of the period	$	772	767

Temporary impairment or impairment recovery, affected through a change in the MSR valuation allowance, was 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 of the servicing assets for the three months ended March 31:
($ in millions)		2013	2012
Fixed rate residential mortgage loans:
Beginning balance	$	664	649
Ending balance		731	732
Adjustable rate residential mortgage loans:
Beginning balance		33	32
Ending balance		35	35
Fixed rate automobile loans:
Beginning balance		-	-
Ending balance		6	-

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
		ended March 31,
($ in millions)		2013	2012
Securities gains, net - non-qualifying hedges on MSRs	$	2	-
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio (Mortgage banking net revenue)		(6)	4
Recovery of MSR impairment (Mortgage banking net revenue)		49	11

As of March 31, 2013 and 2012, the key economic assumptions used in measuring the interests in residential mortgage loans that continued to be held by the Bancorp at the date of sale or securitization resulting from transactions completed during the three months ended:
		March 31, 2013						March 31, 2012
	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	7.3	8.8	%	10.0	%	N/A	7.5	8.2	%	10.6	%	N/A
Servicing assets	Adjustable	3.5	23.4		11.4		N/A	3.8	21.9		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 March 31, 2013 and December 31, 2012, the Bancorp serviced $64.8billion and$62.5billion, 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.

At March 31, 2013, 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 other assumptions are 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	$	731	5.4	14.0	%	$	(37)	(71)	(160)	10.5	%	$	(26)	(50)
Servicing assets	Adjustable		35	3.1	26.8			(2)	(3)	(7)	11.7			(1)	(2)

• 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 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 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.