Note 6

Mortgage Servicing Rights

The Company serviced $232.4 billion of residential mortgage loans for others at June 30, 2017, and $232.6 billion at December 31, 2016, 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 $5 million and net losses of $10 million for the three months ended June 30, 2017 and 2016, respectively and net gains of $17 million and net losses of $32 million for the six months ended June 30, 2017 and 2016, respectively. Loan servicing and ancillary fees, not including valuation changes, included in mortgage banking revenue were $186 million and $187 million for the three months ended June 30, 2017 and 2016, respectively, and $378 million and $371 million for the six months ended June 30, 2017 and 2016, respectively.

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


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in Millions)	2017			2016			2017			2016
Balance at beginning of period	$	2,642		$	2,222		$	2,591		$	2,512
Rights purchased		4			6			6			14
Rights capitalized		82			131			204			230
Changes in fair value of MSRs
Due to fluctuations in market interest rates (a)		(50	)		(187	)		(30	)		(488	)
Due to revised assumptions or models (b)		5			–			17			–
Other changes in fair value (c)		(101	)		(116	)		(206	)		(212	)
Balance at end of period	$	2,582		$	2,056		$	2,582		$	2,056

(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, 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:


	June 30, 2017																		December 31, 2016
(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	$	(516	)	$	(229	)	$	(108	)	$	95		$	177		$	305		$	(476	)	$	(209	)	$	(98	)	$	85		$	159		$	270
Derivative instrument hedges		478			223			106			(99	)		(191	)		(356	)		375			180			88			(84	)		(165	)		(314	)
Net sensitivity	$	(38	)	$	(6	)	$	(2	)	$	(4	)	$	(14	)	$	(51	)	$	(101	)	$	(29	)	$	(10	)	$	1		$	(6	)	$	(44	)

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:


	June 30, 2017												December 31, 2016
(Dollars in Millions)	HFA			Government			Conventional (c)			Total			HFA			Government			Conventional (c)			Total
Servicing portfolio (a)	$	38,104		$	37,314		$	155,272		$	230,690		$	34,746		$	37,530		$	157,771		$	230,047
Fair value	$	425		$	420		$	1,737		$	2,582		$	398		$	422		$	1,771		$	2,591
Value (bps) (b)		112			113			112			112			115			112			112			113
Weighted-average servicing fees (bps)		35			34			27			30			36			34			27			30
Multiple (value/servicing fees)		3.20			3.32			4.15			3.73			3.19			3.29			4.15			3.77
Weighted-average note rate		4.39	%		3.93	%		4.02	%		4.07	%		4.37	%		3.95	%		4.02	%		4.06	%
Weighted-average age (in years)		2.9			4.0			3.9			3.8			2.9			3.8			3.8			3.7
Weighted-average expected prepayment (constant prepayment rate)		9.6	%		11.7	%		10.0	%		10.2	%		9.4	%		11.3	%		9.8	%		10.0	%
Weighted-average expected life (in years)		7.8			6.5			6.8			6.9			8.0			6.8			6.9			7.0
Weighted-average option adjusted spread (d)		9.9	%		9.2	%		7.2	%		8.0	%		9.9	%		9.2	%		7.2	%		8.0	%

(a)

Represents principal balance of mortgages having corresponding MSR asset.

(b)

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.