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Goodwill and Mortgage Servicing Rights
 3 Months Ended
Mar. 31, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Mortgage Servicing Rights GOODWILL AND MORTGAGE SERVICING RIGHTS

Goodwill

See Note 1 Accounting Policies in this Report and Note 7 Goodwill and Mortgage Servicing Rights in our 2019 Form 10-K for more information regarding our goodwill.

Mortgage Servicing Rights
We recognize the right to service mortgage loans for others as an intangible asset when the servicing income we receive is more than adequate compensation. MSRs totaled $1.1 billion and $1.6 billion at March 31, 2020 and December 31, 2019, respectively, and consisted of loan servicing contracts for commercial and residential mortgages measured at fair value.

MSRs are subject to declines in value from actual or expected prepayment of the underlying loans and defaults as well as market driven changes in interest rates. We manage this risk by economically hedging the fair value of MSRs with securities and derivative instruments which are expected to increase (or decrease) in value when the value of MSRs decreases (or increases).

See the Sensitivity Analysis section of this Note 5, as well as Note 6 Fair Value in our 2019 Form 10-K for more detail on our fair value measurement of MSRs. Refer to Note 7 Goodwill and Mortgage Servicing Rights in our 2019 Form 10-K for more information on our accounting and measurement of MSRs.
Changes in the commercial and residential MSRs follow:

Table 53: Mortgage Servicing Rights
 
Commercial MSRs
 
Residential MSRs
 
In millions
2020

2019

 
2020

2019

 
January 1
$
649

$
726

 
$
995

$
1,257

 
Additions:
 
 
 
 
 
 
From loans sold with servicing retained
11

7

 
10

7

 
Purchases
19

19

 
18

6

 
Changes in fair value due to:
 
 
 
 
 
 
Time and payoffs (a)
(35
)
(38
)
 
(39
)
(33
)
 
Other (b)
(167
)
(33
)
 
(379
)
(106
)
 
March 31
$
477

$
681

 
$
605

$
1,131

 
Related unpaid principal balance at March 31
$
225,769

$
186,946

 
$
118,104

$
123,079

 
Servicing advances at March 31
$
145

$
243

 
$
99

$
138

 
(a)
Represents decrease in MSR value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period.
(b)
Represents MSR value changes resulting primarily from market-driven changes in interest rates.

Sensitivity Analysis
The fair value of commercial and residential MSRs and significant inputs to the valuation models as of March 31, 2020 are shown in Tables 54 and 55. The expected and actual rates of mortgage loan prepayments are significant factors driving the fair value. Management uses both internal proprietary models and a third-party model to estimate future commercial mortgage loan prepayments and a third-party model to estimate future residential mortgage loan prepayments. These models have been refined based on current market conditions and management judgment. Future interest rates are another important factor in the valuation of MSRs. Management utilizes market implied forward interest rates to estimate the future direction of mortgage and discount rates. The forward rates utilized are derived from the current yield curve for U.S. dollar interest rate swaps and are consistent with pricing of capital markets instruments. Changes in the shape and slope of the forward curve in future periods may result in volatility in the fair value estimate.

A sensitivity analysis of the hypothetical effect on the fair value of MSRs to adverse changes in key assumptions is presented in Tables 54 and 55. These sensitivities do not include the impact of the related hedging activities. Changes in fair value generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the interest rate spread), which could either magnify or counteract the sensitivities.

The following tables set forth the fair value of commercial and residential MSRs and the sensitivity analysis of the hypothetical effect on the fair value of MSRs to immediate adverse changes of 10% and 20% in those assumptions.
Table 54: Commercial Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millions
March 31
2020

 
December 31
2019

 
Fair value
$
477

 
$
649

 
Weighted-average life (years)
4.1

 
4.1

 
Weighted-average constant prepayment rate
4.51
%
 
4.56
%
 
Decline in fair value from 10% adverse change
$
8

 
$
9

 
Decline in fair value from 20% adverse change
$
16

 
$
17

 
Effective discount rate
7.57
%
 
7.91
%
 
Decline in fair value from 10% adverse change
$
12

 
$
17

 
Decline in fair value from 20% adverse change
$
24

 
$
34

 

Table 55: Residential Mortgage Servicing Rights – Key Valuation Assumptions
Dollars in millions
March 31
2020

 
December 31
2019

 
Fair value
$
605

 
$
995

 
Weighted-average life (years)
2.9

 
5.2

 
Weighted-average constant prepayment rate
27.14
%
 
13.51
%
 
Decline in fair value from 10% adverse change
$
43

 
$
46

 
Decline in fair value from 20% adverse change
$
81

 
$
89

 
Weighted-average option adjusted spread
770

bps
769

bps
Decline in fair value from 10% adverse change
$
13

 
$
27

 
Decline in fair value from 20% adverse change
$
26

 
$
52

 


Fees from mortgage loan servicing, which includes contractually specified servicing fees, late fees and ancillary fees were $.1 billion for the three months ended March 31, 2020 and 2019. We also generate servicing fees from fee-based activities provided to others for which we do not have an associated servicing asset. Fees from commercial and residential MSRs are reported within Noninterest income on our Consolidated Income Statement in Corporate services and Residential mortgage, respectively.