
Note 5		Mortgage Servicing Rights

The Company serviced $211.3 billion of residential mortgage loans for others at September 30, 2012, and $191.1 billion at December 31, 2011. The net impact included in mortgage banking revenue of fair value changes of MSRs and derivatives used to economically hedge MSRs were net gains of $10 million and $7 million for the three months ended September 30, 2012 and 2011, respectively, and net gains of $72 million and $151 million for the nine months ended September 30, 2012 and 2011, respectively. Loan servicing fees, not including valuation changes, included in mortgage banking revenue, were $181 million and $166 million for the three months ended September 30, 2012 and 2011, respectively, and $526 million and $483 million for the nine months ended September 30, 2012 and 2011, respectively.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2012			2011			2012			2011
Balance at beginning of period	$	1,594		$	1,989		$	1,519		$	1,837
Rights purchased		10			5			39			16
Rights capitalized		224			101			700			416
Changes in fair value of MSRs
Due to fluctuations in market interest rates (a)		(123	)		(534	)		(298	)		(569	)
Due to revised assumptions or models (b)		(2	)		2			(19	)		27
Other changes in fair value (c)		(150	)		(97	)		(388	)		(261	)

Balance at end of period	$	1,553		$	1,466		$	1,553		$	1,466

(a)

Includes changes in MSR value associated with changes in market interest rates, including estimated prepayment rates and anticipated earnings on escrow deposits.

(b)

Includes changes in MSR value not caused by changes in market interest rates, such as changes in cost to service, ancillary income, and discount rate, as well as the impact of any model changes.

(c)

Primarily represents changes due to 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 was as follows:


	September 30, 2012																		December 31, 2011
(Dollars in Millions)	Down 100 bps			Down 50 bps			Down 25 bps			Up 25 bps			Up 50 bps			Up 100 bps			Down 100 bps			Down 50 bps			Down 25 bps			Up 25 bps			Up 50 bps			Up 100 bps
MSR portfolio	$	(262	)	$	(162	)	$	(94	)	$	109		$	231		$	483		$	(305	)	$	(183	)	$	(98	)	$	107		$	223		$	460
Derivative instrument hedges		405			208			105			(105	)		(210	)		(422	)		378			204			104			(107	)		(217	)		(445	)
Net sensitivity	$	143		$	46		$	11		$	4		$	21		$	61		$	73		$	21		$	6		$	—		$	6		$	15

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 was as follows:


	September 30, 2012												December 31, 2011
(Dollars in Millions)	MRBP			Government			Conventional (b)			Total			MRBP			Government			Conventional (b)			Total
Servicing portfolio	$	13,939		$	38,162		$	159,162		$	211,263		$	13,357		$	32,567		$	145,158		$	191,082
Fair market value	$	154		$	304		$	1,095		$	1,553		$	155		$	290		$	1,074		$	1,519
Value (bps) (a)		110			80			69			74			116			89			74			79
Weighted-average servicing fees (bps)		40			34			30			31			40			36			29			31
Multiple (value/servicing fees)		2.75			2.35			2.30			2.39			2.90			2.47			2.55			2.55
Weighted-average note rate		5.24	%		4.69	%		4.63	%		4.68	%		5.50	%		5.08	%		4.97	%		5.03	%
Weighted-average age (in years)		4.2			2.4			2.5			2.6			4.2			2.5			2.8			2.8
Weighted-average expected prepayment (constant prepayment rate)		13.1	%		21.6	%		23.1	%		22.2	%		12.9	%		21.1	%		22.1	%		21.3	%
Weighted-average expected life (in years)		6.2			4.0			3.5			3.8			6.4			4.0			3.8			4.0
Weighted-average discount rate		12.1	%		11.4	%		10.0	%		10.4	%		12.1	%		11.3	%		10.0	%		10.4	%

(a)

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

(b)

Represents loans sold primarily to GSEs.