
Note 5		Mortgage Servicing Rights

The Company serviced $226.7 billion of residential mortgage loans for others at September 30, 2013, and $215.6 billion at December 31, 2012. 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 $108 million and $10 million for the three months ended September 30, 2013 and 2012, respectively, and net gains of $163 million and $72 million for the nine months ended September 30, 2013 and 2012, respectively. Loan servicing fees, not including valuation changes, included in mortgage banking revenue, were $192 million and $181 million for the three months ended September 30, 2013 and 2012, respectively, and $566 million and $526 million for the nine months ended September 30, 2013 and 2012, 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)	2013			2012			2013			2012
Balance at beginning of period	$	2,377		$	1,594		$	1,700		$	1,519
Rights purchased		2			10			7			39
Rights capitalized		187			224			674			700
Changes in fair value of MSRs
Due to fluctuations in market interest rates (a)		71			(123	)		503			(298	)
Due to revised assumptions or models (b)		42			(2	)		33			(19	)
Other changes in fair value (c)		(102	)		(150	)		(340	)		(388	)
Balance at end of period	$	2,577		$	1,553		$	2,577		$	1,553

(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, 2013																		December 31, 2012
(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	$	(494	)	$	(223	)	$	(107	)	$	92		$	173		$	324		$	(370	)	$	(217	)	$	(118	)	$	126		$	249		$	480
Derivative instrument hedges		427			211			102			(93	)		(174	)		(317	)		473			249			124			(121	)		(243	)		(486	)
Net sensitivity	$	(67	)	$	(12	)	$	(5	)	$	(1	)	$	(1	)	$	7		$	103		$	32		$	6		$	5		$	6		$	(6	)

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, 2013												December 31, 2012
(Dollars in Millions)	MRBP			Government			Conventional (b)			Total			MRBP			Government			Conventional (b)			Total
Servicing portfolio	$	15,088		$	41,192		$	170,447		$	226,727		$	14,143		$	39,048		$	162,446		$	215,637
Fair value	$	171		$	474		$	1,932		$	2,577		$	154		$	314		$	1,232		$	1,700
Value (bps) (a)		113			115			113			114			109			80			76			79
Weighted-average servicing fees (bps)		39			32			29			30			40			33			30			31
Multiple (value/servicing fees)		2.90			3.59			3.90			3.80			2.73			2.42			2.53			2.55
Weighted-average note rate		4.76	%		4.26	%		4.19	%		4.24	%		5.13	%		4.57	%		4.48	%		4.54	%
Weighted-average age (in years)		4.0			2.5			2.4			2.5			4.2			2.4			2.5			2.6
Weighted-average expected prepayment (constant prepayment rate)		13.1	%		12.6	%		12.2	%		12.3	%		13.2	%		21.2	%		20.4	%		20.1	%
Weighted-average expected life (in years)		6.3			6.5			6.8			6.7			6.1			4.2			4.1			4.2
Weighted-average discount rate		12.0	%		11.2	%		9.8	%		10.2	%		12.1	%		11.4	%		10.0	%		10.4	%

(a)

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

(b)

Represents loans sold primarily to GSEs.