Intangible Assets

Intangible assets consisted of the following:



	September 30, 2013		December 31, 2012
	(in millions)
Mortgage servicing rights:
Residential	$	224	$	168
Commercial	11		11
Total mortgage servicing rights	$	235	$	179
Purchased credit card relationships	55		60
Favorable lease agreements	5		8
Total intangible assets	$	295	$	247

Mortgage Servicing Rights (“MSRs”) A servicing asset is a contract under which estimated future revenues from contractually specified cash flows, such as servicing fees and other ancillary revenues, are expected to exceed the obligation to service the financial assets. We recognize the right to service mortgage loans as a separate and distinct asset at the time they are acquired or when originated loans are sold.

MSRs are subject to credit, prepayment and interest rate risk, in that their value will fluctuate as a result of changes in these economic variables. Interest rate risk is mitigated through an economic hedging program that uses securities and derivatives to offset changes in the fair value of MSRs. Since the hedging program involves trading activity, risk is quantified and managed using a number of risk assessment techniques.

Residential mortgage servicing rights Residential MSRs are initially measured at fair value at the time that the related loans are sold and remeasured at fair value at each reporting date. Changes in fair value of MSRs are reflected in residential mortgage banking revenue in the period in which the changes occur. Fair value is determined based upon the application of valuation models and other inputs. The valuation models incorporate assumptions market participants would use in estimating future cash flows. The reasonableness of these valuation models is periodically validated by reference to external independent broker valuations and industry surveys.

The following table summarizes the critical assumptions used to calculate the fair value of residential MSRs:



	September 30, 2013		December 31, 2012
Annualized constant prepayment rate (“CPR”)	12.5	%	22.4	%
Constant discount rate	12.8	%	11.3	%
Weighted average life	5.0		3.4

The following table summarizes residential MSRs activity:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(in millions)
Fair value of MSRs:
Beginning balance	$	225		$	187		$	168		$	220
Additions related to loan sales	3			6			14			20
Changes in fair value due to:
Change in valuation model inputs or assumptions	4			(5		)	73			(20		)
Customer payments	(8		)	(15		)	(31		)	(47		)
Ending balance	$	224		$	173		$	224		$	173

The following table summarizes information regarding residential mortgage loans serviced for others, which are not included in the consolidated balance sheet:



	September 30, 2013		December 31, 2012
	(in millions)
Outstanding principal balances at period end	$	28,211	$	32,041
Custodial balances maintained and included in noninterest bearing deposits at period end	$	—	$	810

Our CPR assumption declined significantly at September 30, 2013 compared with December 31, 2012 due to rising interest rates which was the primary driver of the increase in value.

During the second quarter of 2013, we completed the conversion of our mortgage processing and servicing operations to PHH Mortgage under our previously announced strategic relationship agreement with PHH Mortgage to manage our mortgage processing and servicing operations. Under the terms of the agreement, PHH Mortgage provides us with mortgage origination processing services as well as sub-servicing of our portfolio of owned and serviced mortgages totaling $45.2 billion as of September 30, 2013. Although we continue to own both the mortgages on our balance sheet and the mortgage servicing rights associated with the serviced loans at the time of conversion, we now sell our agency eligible originations beginning with May 2013 applications to PHH Mortgage on a servicing released basis which results in no new mortgage servicing rights being recognized. As a result, we no longer maintain custodial balances for loans sold to PHH. No significant one-time restructuring costs have been incurred as a result of this transaction.

Servicing fees collected are included in residential mortgage banking revenue and totaled $20 million and $62 million during the three and nine months ended September 30, 2013, respectively, compared with $21 million and $68 million during the three and nine months ended September 30, 2012, respectively.

Commercial mortgage servicing rights Commercial MSRs, which are accounted for using the lower of amortized cost or fair value method, totaled $11 million and $11 million at September 30, 2013 and December 31, 2012, respectively.

Purchased credit card relationships In March 2012, we purchased from HSBC Finance the account relationships associated with $746 million of credit card receivables which were not included in the sale to Capital One at a fair value of $108 million. Approximately $43 million of this value was associated with the credit card receivables sold to First Niagara. The remaining $65 million was included in intangible assets and is being amortized over its estimated useful life of ten years.