Note 8: Mortgage Banking Activities

Mortgage banking activities, included in the Community Banking and Wholesale Banking operating segments, consist of residential and commercial mortgage originations, sale activity and servicing.

We apply the amortization method to commercial MSRs and apply the fair value method to residential MSRs. Table 8.1 presents the changes in MSRs measured using the fair value method.

Table 8.1: Analysis of Changes in Fair Value MSRs



	Quarter ended Sep 30,					Nine months ended Sep 30,
(in millions)	2016			2015		2016		2015
Fair value, beginning of period	$	10,396		12,661		12,415		12,738
Servicing from securitizations or asset transfers (1)	609			448		1,452		1,184
Sales and other (2)	4			6		(18	)	—
Net additions	613			454		1,434		1,184
Changes in fair value:
Due to changes in valuation model inputs or assumptions:
Mortgage interest rates (3)	39			(858	)	(1,824	)	(313	)
Servicing and foreclosure costs (4)	(10		)	(18	)	13		(46	)
Prepayment estimates and other (5)	(37		)	43		22		(194	)
Net changes in valuation model inputs or assumptions	(8		)	(833	)	(1,789	)	(553	)
Other changes in fair value (6)	(586		)	(504	)	(1,645	)	(1,591	)
Total changes in fair value	(594		)	(1,337	)	(3,434	)	(2,144	)
Fair value, end of period	$	10,415		11,778		10,415		11,778


(1)	Includes impacts associated with exercising our right to repurchase delinquent loans from GNMA loan securitization pools.


(2)	Includes sales and transfers of MSRs, which can result in an increase of total reported MSRs if the sales or transfers are related to nonperforming loan portfolios.


(3)	Includes prepayment speed changes as well as other valuation changes due to changes in mortgage interest rates (such as changes in estimated interest earned on custodial deposit balances).


(4)	Includes costs to service and unreimbursed foreclosure costs.


(5)	Represents changes driven by other valuation model inputs or assumptions including prepayment speed estimation changes and other assumption updates. Prepayment speed estimation changes are influenced by observed changes in borrower behavior and other external factors that occur independent of interest rate changes.


(6)	Represents changes due to collection/realization of expected cash flows over time.

Table 8.2 presents the changes in amortized MSRs.

Table 8.2: Analysis of Changes in Amortized MSRs



	Quarter ended Sep 30,					Nine months ended Sep 30,
(in millions)	2016			2015		2016		2015
Balance, beginning of period	$	1,353		1,262		1,308		1,242
Purchases	18			45		63		96
Servicing from securitizations or asset transfers	69			35		204		131
Amortization	(67		)	(65	)	(202	)	(192	)
Balance, end of period (1)	$	1,373		1,277		1,373		1,277
Fair value of amortized MSRs:
Beginning of period	$	1,620		1,692		1,680		1,637
End of period	1,627			1,643		1,627		1,643


(1)	Commercial amortized MSRs are evaluated for impairment purposes by the following risk strata: agency (GSEs) and non-agency. There was no valuation allowance recorded for the periods presented on the commercial amortized MSRs.

We present the components of our managed servicing portfolio in Table 8.3 at unpaid principal balance for loans serviced and subserviced for others and at book value for owned loans serviced.

Table 8.3: Managed Servicing Portfolio



(in billions)	Sep 30, 2016			Dec 31, 2015
Residential mortgage servicing:
Serviced for others	$	1,226		1,300
Owned loans serviced	352			345
Subserviced for others	4			4
Total residential servicing	1,582			1,649
Commercial mortgage servicing:
Serviced for others	477			478
Owned loans serviced	130			122
Subserviced for others	8			7
Total commercial servicing	615			607
Total managed servicing portfolio	$	2,197		2,256
Total serviced for others	$	1,703		1,778
Ratio of MSRs to related loans serviced for others	0.69		%	0.77

Table 8.4 presents the components of mortgage banking noninterest income.

Table 8.4: Mortgage Banking Noninterest Income



		Quarter ended Sep 30,					Nine months ended Sep 30,
(in millions)		2016			2015		2016		2015
Servicing income, net:
Servicing fees:
Contractually specified servicing fees		$	954		1,001		2,857		3,029
Late charges		45			48		135		147
Ancillary fees		56			69		171		221
Unreimbursed direct servicing costs (1)		(177		)	(128	)	(533	)	(371	)
Net servicing fees		878			990		2,630		3,026
Changes in fair value of MSRs carried at fair value:
Due to changes in valuation model inputs or assumptions (2)	(A)	(8		)	(833	)	(1,789	)	(553	)
Other changes in fair value (3)		(586		)	(504	)	(1,645	)	(1,591	)
Total changes in fair value of MSRs carried at fair value		(594		)	(1,337	)	(3,434	)	(2,144	)
Amortization		(67		)	(65	)	(202	)	(192	)
Net derivative gains from economic hedges (4)	(B)	142			1,086		2,575		1,021
Total servicing income, net		359			674		1,569		1,711
Net gains on mortgage loan origination/sales activities		1,308			915		3,110		3,130
Total mortgage banking noninterest income		$	1,667		1,589		4,679		4,841
Market-related valuation changes to MSRs, net of hedge results (2)(4)	(A)+(B)	$	134		253		786		468


(1)	Includes costs associated with foreclosures, unreimbursed interest advances to investors, and other interest costs.


(2)	Refer to the changes in fair value of MSRs table in this Note for more detail.


(3)	Represents changes due to collection/realization of expected cash flows over time.


(4)	Represents results from economic hedges used to hedge the risk of changes in fair value of MSRs. See Note 12 (Derivatives Not Designated as Hedging Instruments) for additional discussion and detail.

Table 8.5 summarizes the changes in our liability for mortgage loan repurchase losses. This liability is in “Accrued expenses and other liabilities” in our consolidated balance sheet and the provision for repurchase losses reduces net gains on mortgage loan origination/sales activities in “Mortgage banking” in our consolidated income statement.

Because of the uncertainty in the various estimates underlying the mortgage repurchase liability, there is a range of losses in excess of the recorded mortgage repurchase liability that is reasonably possible. The estimate of the range of possible loss for representations and warranties does not represent a probable loss, and is based on currently available information, significant judgment, and a number of assumptions that are subject to change. The high end of this range of reasonably possible losses exceeded our recorded liability by $191 million at September 30, 2016, and was determined based upon modifying the assumptions (particularly to assume significant changes in investor repurchase demand practices) used in our best estimate of probable loss to reflect what we believe to be the high end of reasonably possible adverse assumptions.

Table 8.5: Analysis of Changes in Liability for Mortgage Loan Repurchase Losses



	Quarter ended Sep 30,					Nine months ended Sep 30,
(in millions)	2016			2015		2016		2015
Balance, beginning of period	$	255		557		378		615
Provision for repurchase losses:
Loan sales	11			11		26		34
Change in estimate (1)	(24		)	(17	)	(132	)	(74	)
Net reductions	(13		)	(6	)	(106	)	(40	)
Losses	(3		)	(13	)	(33	)	(37	)
Balance, end of period	$	239		538		239		538


(1)	Results from changes in investor demand and mortgage insurer practices, credit deterioration and changes in the financial stability of correspondent lenders.