Sales of Receivables and Servicing Rights

9 Months Ended

Sep. 30, 2018

Sales of Receivables and Servicing Rights

Sales of Receivables and Servicing Rights

11. Sales of Receivables and Servicing Rights

Residential Mortgage Loan Sales

The Bancorp sold fixed and adjustable-rate residential mortgage loans during both the three and nine months ended September 30, 2018 and 2017. 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 Condensed Consolidated Statements of Income, is as follows:
		For the three months ended		For the nine months ended
		September 30,		September 30,
($ in millions)		2018	2017	2018	2017
Residential mortgage loan sales(a)	$	1,446	1,593	3,919	4,740
Origination fees and gains on loan sales		25	40	77	106
Gross mortgage servicing fees		56	56	162	152

Represents the unpaid principal balance at the time of the sale.

Servicing Rights

The Bancorp measures all of its 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)		2018	2017
Balance, beginning of period	$	858	744
Servicing rights originated - residential mortgage loans		62	99
Servicing rights acquired - residential mortgage loans		82	109
Changes in fair value:
Due to changes in inputs or assumptions(a)		103	(15)
Other changes in fair value(b)		(95)	(89)
Balance, end of period	$	1,010	848

• 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.

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 presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy:
		For the three months ended		For the nine months ended
		September 30,		September 30,
($ in millions)		2018	2017	2018	2017
Securities (losses) gains, net - non-qualifying hedges on MSRs	$	(1)	2	(18)	4
Changes in fair value and settlement of free-standing derivatives purchased
to economically hedge the MSR portfolio(a)		(24)	1	(89)	16
MSR fair value adjustment due to changes in inputs or assumptions(a)		25	(2)	103	(15)

(a) Included in mortgage banking net revenue in the Condensed 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 three months ended September 30, 2018 and 2017 were as follows:
		September 30, 2018				September 30, 2017
	Rate	Weighted-Average Life (in years)	Prepayment Speed(annual)		OAS Spread(bps)	Weighted-Average Life (in years)	Prepayment Speed(annual)		OAS Spread(bps)
Residential mortgage loans:
Servicing rights	Fixed	6.5	11.1	%	517	7.6	9.2	%	499
Servicing rights	Adjustable	3.3	23.7		700	2.5	35.1		650

Based on historical credit experience, expected credit losses for residential mortgage loan servicing rights have been deemed immaterial, as the Bancorp sold the majority of the underlying loans without recourse. At September 30, 2018 and December 31, 2017, the Bancorp serviced $64.0 billion and $60.0 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 September 30, 2018, 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
											OAS Spread		Impact of
				Weighted-				Impact of Adverse Change					Adverse Change
			Fair	Average Life				on Fair Value					on Fair Value
($ in millions)(a)	Rate		Value	(in years)	Rate			10%	20%	50%	(bps)		10%	20%
Residential mortgage loans:
Servicing rights	Fixed	$	996	6.6	9.1	%	$	(36)	(70)	(162)	533	$	(20)	(39)
Servicing rights	Adjustable		14	3.5	23.2			(1)	(2)	(4)	842		-	(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.