Sales of Receivables and Servicing Rights

12 Months Ended

Dec. 31, 2017

Sales of Receivables and Servicing Rights

Sales of Receivables and Servicing Rights

12. SALES OF RECEIVABLES AND SERVICING RIGHTS

Residential Mortgage TDR Loan Sale

In March of 2015, the Bancorp recognized a $37 million gain, included in other noninterest income in the Consolidated Statements of Income, on the sale of certain HFS residential mortgage loans with a carrying value of $568 million that were previously modified in a TDR. As part of this sale, the Bancorp provided certain standard representations and warranties which have expired. Additionally, the Bancorp did not obtain servicing responsibilities on the sales of these loans and the investors have no credit recourse to the Bancorp’s other assets for failure of debtors to pay when due.

Residential Mortgage Loan Sales

The Bancorp sold fixed and adjustable-rate residential mortgage loans during the years ended December 31, 2017, 2016 and 2015. 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 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 Consolidated Statements of Income, for the years ended December 31 is as follows:

($ in millions)		2017	2016	2015
Residential mortgage loan sales^(a)	$	6,369	6,927	5,078^(b)

Origination fees and gains on loan sales		138	186	171
Gross mortgage servicing fees		206	199	222

Represents the unpaid principal balance at the time of the sale.
Excludes $568 of HFS residential mortgage loans previously modified in a TDR that were sold during the first quarter of 2015.

Servicing Rights

Effective January 1, 2017, the Bancorp elected to prospectively adopt the fair value method for all classes of its residential mortgage servicing rights portfolio. Upon this election, all servicing rights are measured at fair value at each reporting date and changes in the fair value of servicing rights are reported in mortgage banking net revenue in the Consolidated Statements of Income in the period in which the changes occur. The election of the fair value method did not require a cumulative effect adjustment to retained earnings as there was no difference between the carrying value of the servicing rights, net of valuation allowance, and the fair value.

Prior to the election of the fair value method, servicing rights were initially recorded at fair value and subsequently amortized in proportion to, and over the period of, estimated net servicing revenue. Servicing rights were assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance.


The following tables present changes in the servicing rights related to residential mortgage and automobile loans for the years ended December 31:

($ in millions)		2017
Balance, beginning of period	$	744
Servicing rights originated - residential mortgage loans		127
Servicing rights acquired - residential mortgage loans		109
Changes in fair value:
Due to changes in inputs or assumptions^(a)		(1)
Other changes in fair value^(b)		(121)
Balance, end of period	$	858

Primarily reflects changes in prepayment speed and OAS spread assumptions which are updated based on market interest rates.
Primarily reflects changes due to collection of contractual cash flows and the passage of time.


($ in millions)		2016
Carrying amount before valuation allowance:
Balance, beginning of period	$	1,204
Servicing rights that result from the transfer of residential mortgage loans		83
Amortization		(131)
Balance, end of period	$	1,156
Valuation allowance for servicing rights:
Balance, beginning of period	$	(419)
Recovery of MSR impairment		7
Balance, end of period		(412)
Carrying amount after valuation allowance	$	744

For the years ended December 31, 2016 and 2015, temporary impairment, effected through a change in the MSR valuation allowance, was captured as a component of mortgage banking net revenue in the Consolidated Statements of Income. Amortization expense recognized on servicing rights for the years ended December 31, 2016 and 2015 was $131 million and $140 million, respectively.

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 and trading 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 spreads, 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 rights for the years ended December 31:

($ in millions)		2017	2016
Fixed-rate residential mortgage loans:
Balance, beginning of period	$	722	757
Balance, end of period		841	722
Adjustable-rate residential mortgage loans:
Balance, beginning of period		22	27
Balance, end of period		17	22
Fixed-rate automobile loans:
Balance, beginning of period		-	1
Balance, end of period		-	-

The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy for the years ended December 31:

($ in millions)		2017	2016	2015
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^(a)		2	24	90
MSR fair value adjustment^(a)		(122)	-	-
Recovery of MSR impairment^(a)		-	7	4

Included in mortgage banking net revenue in the Consolidated Statements of Income.

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, securitization, or purchase resulting from transactions completed during the years ended December 31 were as follows:

		2017				2016
		Weighted-	Prepayment			Weighted-	Prepayment
		Average Life	Speed		OAS Spread	Average Life	Speed		OAS Spread
	Rate	(in years)	(annual)		(bps)	(in years)	(annual)		(bps)
Residential mortgage loans:
Servicing rights	Fixed	7.5	9.1	%	497	7.2	10.3	%	584
Servicing rights	Adjustable	2.7	32.1		660	2.8	30.2		679

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 December 31, 2017 and 2016, the Bancorp serviced $60.0 billion and $53.6 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.


At December 31, 2017, 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 spread are as follows:

					Prepayment						OAS
					Speed Assumption						Spread Assumption
			Fair	Weighted-Average Life				Impact of Adverse Change on Fair Value			OAS Spread		Impact of Adverse Change on Fair Value
($ in millions)^(a)	Rate		Value	(in years)	Rate			10%	20%	50%	(bps)		10%	20%
Residential mortgage loans:
Servicing rights	Fixed	$	841	6.0	11.4	%	$	(36)	(69)	(158)	549	$	(17)	(33)
Servicing rights	Adjustable		17	3.3	24.6			(1)	(2)	(5)	785		-	(1)

(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 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.

- Definition

The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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