NOTE 9 _{Mortgage Servicing Rights}

The Company serviced $232.6 billion of residential mortgage loans for others at December 31, 2016, and $231.8 billion at December 31, 2015, which include 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 $7 million, $23 million and $241 million (of which $44 million related to excess servicing rights sold during 2014) for the years ended December 31, 2016, 2015 and 2014, respectively. Loan servicing and ancillary fees, not including valuation changes, included in mortgage banking revenue, were $750 million, $728 million and $732 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Changes in fair value of capitalized MSRs for the years ended December 31, are summarized as follows:


(Dollars in Millions)	2016			2015			2014
Balance at beginning of period	$	2,512		$	2,338		$	2,680
Rights purchased		43			29			5
Rights capitalized		524			632			382
Rights sold		–			–			(141	)
Changes in fair value of MSRs
Due to fluctuations in market interest rates^(a)		(55	)		(58	)		(276	)
Due to revised assumptions or models^(b)		19			10			86
Other changes in fair value^(c)		(452	)		(439	)		(398	)

Balance at end of period	$	2,591		$	2,512		$	2,338

(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 option adjusted spread or discount rate, as well as the impact of any model changes. 2014 includes a $44 million revaluation gain related to excess servicing rights sold.

(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 as of December 31 follows:


	2016																		2015
(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	$	(476	)	$	(209	)	$	(98	)	$	85		$	159		$	270		$	(598	)	$	(250	)	$	(114	)	$	96		$	176		$	344
Derivative instrument hedges		375			180			88			(84	)		(165	)		(314	)		475			226			107			(98	)		(192	)		(377	)
Net sensitivity	$	(101	)	$	(29	)	$	(10	)	$	1		$	(6	)	$	(44	)	$	(123	)	$	(24	)	$	(7	)	$	(2	)	$	(16	)	$	(33	)

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 as of December 31 follows:


	2016												2015
(Dollars in Millions)	HFA			Government			Conventional^(c)			Total			HFA			Government			Conventional^(c)			Total
Servicing portfolio^(a)	$	34,746		$	37,530		$	157,771		$	230,047		$	26,492		$	40,350		$	162,533		$	229,375
Fair value	$	398		$	422		$	1,771		$	2,591		$	297		$	443		$	1,772		$	2,512
Value (bps)^(b)		115			112			112			113			112			110			109			110
Weighted-average servicing fees (bps)		36			34			27			30			36			34			27			29
Multiple (value/servicing fees)		3.19			3.29			4.15			3.77			3.11			3.24			4.04			3.79
Weighted-average note rate		4.37	%		3.95	%		4.02	%		4.06	%		4.46	%		4.08	%		4.09	%		4.13	%
Weighted-average age (in years)		2.9			3.8			3.8			3.7			3.1			3.6			3.4			3.4
Weighted-average expected prepayment (constant prepayment rate)		9.4	%		11.3	%		9.8	%		10.0	%		12.8	%		13.9	%		10.4	%		11.3	%
Weighted-average expected life (in years)		8.0			6.8			6.9			7.0			6.1			5.7			6.6			6.4
Weighted-average option adjusted spread or discount rate^(d)		9.9	%		9.2	%		7.2	%		8.0	%		11.8	%		11.2	%		9.4	%		10.0	%

(a)

Represents principal balance of mortgages having corresponding MSR asset.

(b)

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

(c)

Represents loans sold primarily to GSEs.

(d)

Option adjusted spread is the incremental spread added to the risk-free rate to reflect optionality and other risk inherent in the MSRs. Prior to December 31, 2016 the Company valued MSRs using a static discount rate.