Note 6

Mortgage Servicing Rights

The Company serviced $229.3 billion of residential mortgage loans for others at September 30, 2015, and $225.0 billion at December 31, 2014, which included subserviced mortgages with no corresponding MSRs asset. The net impact included in mortgage banking revenue of fair value changes of MSRs due to changes in valuation assumptions and derivatives used to economically hedge MSRs were net gains of $12 million and $49 million for the three months ended September 30, 2015 and 2014, respectively, and net gains of $18 million and $200 million (of which $44 million related to excess servicing rights sold during the second quarter of 2014) for the nine months ended September 30, 2015 and 2014, respectively. Loan servicing fees, not including valuation changes, included in mortgage banking revenue, were $182 million and $178 million for the three months ended September 30, 2015 and 2014, respectively, and $539 million and $551 million for the nine months ended September 30, 2015 and 2014, 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)	2015			2014			2015			2014
Balance at beginning of period	$	2,481		$	2,412		$	2,338		$	2,680
Rights purchased		7			1			22			3
Rights capitalized		182			109			491			264
Rights sold		–			–			–			(141	)
Changes in fair value of MSRs
Due to fluctuations in market interest rates (a)		(168	)		29			(127	)		(129	)
Due to revised assumptions or models (b)		7			15			9			71
Other changes in fair value (c)		(112	)		(105	)		(336	)		(287	)
Balance at end of period	$	2,397		$	2,461		$	2,397		$	2,461

(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 market interest rates of the fair value of the MSRs portfolio and the related derivative instruments was as follows:


	September 30, 2015																		December 31, 2014
(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	$	(585	)	$	(272	)	$	(129	)	$	108		$	200		$	375		$	(540	)	$	(242	)	$	(114	)	$	100		$	185		$	346
Derivative instrument hedges		496			247			121			(108	)		(203	)		(368	)		441			223			109			(102	)		(197	)		(375	)
Net sensitivity	$	(89	)	$	(25	)	$	(8	)	$	–		$	(3	)	$	7		$	(99	)	$	(19	)	$	(5	)	$	(2	)	$	(12	)	$	(29	)

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 Housing Finance Agency (“HFA”) mortgages. The servicing portfolios are predominantly comprised of fixed-rate agency loans with limited adjustable-rate or jumbo mortgage loans. The HFA 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, 2015												December 31, 2014
(Dollars in Millions)	HFA			Government			Conventional (b)			Total			HFA			Government			Conventional (b)			Total
Servicing portfolio	$	23,843		$	40,362		$	162,730		$	226,935		$	19,706		$	40,471		$	162,620		$	222,797
Fair value	$	265		$	433		$	1,699		$	2,397		$	213		$	426		$	1,699		$	2,338
Value (bps) (a)		111			107			104			106			108			105			104			105
Weighted-average servicing fees (bps)		36			33			27			29			37			33			27			29
Multiple (value/servicing fees)		3.08			3.24			3.85			3.66			2.92			3.18			3.85			3.62
Weighted-average note rate		4.47	%		4.09	%		4.09	%		4.13	%		4.58	%		4.18	%		4.14	%		4.19	%
Weighted-average age (in years)		3.3			3.5			3.4			3.4			3.6			3.2			3.1			3.2
Weighted-average expected prepayment (constant prepayment rate)		12.7	%		15.1	%		11.4	%		12.2	%		12.8	%		14.8	%		11.4	%		12.1	%
Weighted-average expected life (in years)		6.1			5.4			6.3			6.1			6.2			5.5			6.5			6.3
Weighted-average discount rate		11.8	%		11.2	%		9.5	%		10.0	%		11.9	%		11.2	%		9.6	%		10.1	%

(a)

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

(b)

Represents loans sold primarily to GSEs.