Note 7 Mortgage Servicing Rights

The Company serviced $185.6 billion of residential mortgage loans for others at September 30, 2011, and $173.9 billion at December 31, 2010. The net impact included in mortgage banking revenue of fair value changes of MSRs and derivatives used to economically hedge MSRs was a net gain of $7 million and $1 million for the three months ended September 30, 2011, and 2010, respectively, and a net gain of $151 million and $98 million for the nine months ended September 30, 2011 and 2010, respectively. Loan servicing fees, not including valuation changes, included in mortgage banking revenue, were $166 million and $154 million for the three months ended September 30, 2011, and 2010, respectively, and $483 million and $439 million for the nine months ended September 30, 2011 and 2010, respectively.

Changes in fair value of capitalized MSRs are summarized as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in Millions)	2011			2010			2011			2010
Balance at beginning of period	$	1,989		$	1,543		$	1,837		$	1,749
Rights purchased		5			10			16			48
Rights capitalized		101			149			416			398
Changes in fair value of MSRs
Due to change in valuation assumptions (a)		(532	)		(186	)		(542	)		(536	)
Other changes in fair value (b)		(97	)		(94	)		(261	)		(237	)

Balance at end of period	$	1,466		$	1,422		$	1,466		$	1,422


(a)		Principally reflects changes in prepayment speeds, discount rates and escrow earnings assumptions, primarily arising from interest rate changes.
(b)		Primarily represents changes due to collection/realization of expected cash flows over time (decay).

The estimated sensitivity to changes in interest rates of the fair value of the MSRs portfolio and the related derivative instruments at September 30, 2011 and December 31, 2010 follows:


	September 30, 2011								December 31, 2010
	Down		Down		Up		Up		Down		Down			Up		Up
(Dollars in Millions)	50 bps		25 bps		25 bps		50 bps		50 bps		25 bps			25 bps		50 bps
Net fair value	$	24	$	8	$	2	$	14	$	6	$	(5	)	$	5	$	1

The fair value of MSRs and their sensitivity to changes in interest rates is influenced by the mix of the servicing portfolio and characteristics of each segment of the portfolio. The Company’s servicing portfolio consists of the distinct portfolios of government-insured mortgages, conventional mortgages, and Mortgage Revenue Bond Programs (“MRBP”). The servicing portfolios are predominantly comprised of fixed-rate agency loans with limited adjustable-rate or jumbo mortgage loans. The MRBP division specializes in servicing loans made under state and local housing authority programs. These programs provide mortgages to low-income and moderate-income borrowers and are generally government-insured programs with a favorable rate subsidy, down payment and/or closing cost assistance.

A summary of the Company’s MSRs and related characteristics by portfolio at September 30, 2011 and December 31, 2010 follows:


	September 30, 2011												December 31, 2010
(Dollars in Millions)	MRBP			Government			Conventional			Total			MRBP			Government			Conventional			Total
Servicing portfolio	$	13,247		$	32,055		$	140,253		$	185,555		$	12,646		$	28,880		$	132,393		$	173,919
Fair market value	$	163		$	274		$	1,029		$	1,466		$	166		$	342		$	1,329		$	1,837
Value (bps) (a)		123			85			73			79			131			118			100			106
Weighted-average servicing fees (bps)		40			36			29			31			40			38			30			32
Multiple (value/servicing fees)		3.08			2.36			2.52			2.55			3.28			3.11			3.33			3.31
Weighted-average note rate		5.56	%		5.16	%		5.05	%		5.11	%		5.75	%		5.35	%		5.27	%		5.32	%
Age (in years)		4.2			2.4			2.7			2.8			4.1			2.2			2.7			2.7
Expected prepayment (constant prepayment rate)		12.5	%		22.7	%		22.1	%		21.5	%		12.3	%		17.2	%		16.2	%		16.1	%
Expected life (in years)		6.6			3.7			3.8			4.0			6.7			5.1			5.3			5.4
Discount rate		11.9	%		11.2	%		10.2	%		10.5	%		11.9	%		11.4	%		10.3	%		10.6	%


(a)		Value is calculated as fair market value divided by the servicing portfolio.