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Sales of Receivables and Servicing Rights
 3 Months Ended
Mar. 31, 2020
Activity Related to Mortgage Banking Net Revenue [Abstract]  
Sales of Receivables and Servicing Rights
14. Sales of Receivables and Servicing Rights
Residential Mortgage Loan Sales
The Bancorp sold fixed and adjustable-rate residential mortgage loans during the three months ended March 31, 2020 and 2019. 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    
March 31,
 
($ in millions)
 
2020
 
  
2019    
  
Residential mortgage loan sales
(a)
  
$
2,955    
 
    
1,162    
  
                 
Origination fees and gains on loan sales
 
 
81    
 
    
25    
  
Gross mortgage servicing fees
 
 
67    
 
    
55    
  
 
 
 
 
(a)
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 three months ended March 31:
                 
($ in millions)
 
    2020    
 
  
2019    
  
Balance, beginning of period
 
$
993
 
    
938
 
Servicing rights originated
 
 
44
 
    
24
 
Servicing rights purchased
 
 
26
 
    
-
 
Servicing rights obtained in acquisition
 
 
-
 
    
263
 
Changes in fair value:
 
 
 
    
 
Due to changes in inputs or assumptions
(a)
  
 
(331
)
   
(57
 )
Other changes in fair value
(b)
  
 
(47
)
   
(27
 )
Balance, end of period
 
$
685
 
    
1,141
 
 
 
 
 
(a)
Primarily reflects changes in prepayment speed and OAS assumptions which are updated based on market interest rates.
 
 
 
 
(b)
Primarily reflects changes due to c
ollection 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
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    
March 31,
 
($ in millions)
 
2020
 
  
2019     
  
Securities gains, net -
non-qualifying
hedges on MSRs
  
$
3     
 
    
3     
  
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio
(a)
  
 
350     
 
    
60     
  
MSR fair value adjustment due to changes in inputs or assumptions
(a)
  
 
(331)    
 
    
(57)    
  
 
 
 
 
(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 March 31, 2020 and 2019 were as follows:
                                                                         
   
   
March 31, 2020
     
   
March 31, 2019
 
                                                       
 
Rate
   
Weighted-
Average Life
(in years)
   
Prepayment
Speed
(annual)
   
OAS
(bps)
   
   
Weighted-
Average Life
(in years)
   
Prepayment
Speed
(annual)
   
OAS
(bps)
   
 
Residential mortgage loans:
   
     
     
     
     
     
     
     
 
Servicing rights
   
Fixed
   
 
5.7
 
  
 
12.8 
%
 
 
672
 
    
     
5.5
     
13.5 
 %    
490
     
 
Servicing rights
   
Adjustable
   
 
2.9
 
  
 
27.1 
 
  
 
708
 
    
     
-
     
- 
      
-
     
 
 
 
 
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 March 31, 2020 and December 31, 2019, the Bancorp serviced $81.9 billion and $80.7 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 March 31, 2020, 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 are as follows:
                                                                                 
 
   
   
   
Prepayment
Speed Assumption
   
OAS
Spread Assumption
 
 
   
Fair
   
Weighted-
Average Life
(in years)
   
   
Impact of Adverse Change
on Fair Value
   
        OAS    
    
Impact of
Adverse Change
on Fair Value
 
($ in millions)
(a)
  
Rate
   
Value
 
Rate            
    
10%
   
20%
   
50%
   
        (bps)    
    
    10%
   
    20%
 
Residential mortgage loans:
   
     
     
     
     
     
     
     
     
 
Servicing rights
   
Fixed
    $
677
     
3.9
     
19.5 %        
     $
(24
 )    
(46
 )    
(105
 )    
926    
     $
     (18)
     
    (34)
 
Servicing rights
   
Adjustable
     
8
     
3.3
     
23.8            
      
(1
 )    
(1
 )    
(2
 )    
932    
      
-
     
-
 
 
 
 
 
(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.