Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

We utilize fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability through an orderly transaction between market participants at the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on management's judgment, assumptions and estimates related to credit quality, our future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

Valuation Hierarchy

U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority to unobservable inputs where no active market exists, as discussed below.

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which we can participate as of the measurement date;

Level 2 - Quoted prices for similar instruments in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and

Level 3 - Unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value by caption on the Consolidated Statements of Financial Condition and by level in the valuation hierarchy:

	December 31, 2019
	Level 1		Level 2			Level 3			Total Fair Value
	(Dollars in millions)
Investment securities available-for-sale
Agency - Commercial	$	—	$	947		$	—		$	947
Agency - Residential	—		1,015			—			1,015
Municipal obligations	—		31			—			31
Corporate debt obligations	—		77			—			77
Other MBS	—		45			—			45
Certificate of Deposits	—		1			—			1
Loans held-for-sale
Residential first mortgage loans	—		5,219			—			5,219
Commercial Loan	—		—			—			—
Loans held-for-investment
Residential first mortgage loans	—		10			—			10
Home equity	—		—			2			2
Mortgage servicing rights	—		—			291			291
Derivative assets
Rate lock commitments (fallout-adjusted)	—		—			34			34
Mortgage-backed securities forwards	—		2			—			2
Interest rate swaps and swaptions	—		26			—			26
Total assets at fair value	$	—	$	7,373		$	327		$	7,700
Derivative liabilities
Rate lock commitments (fallout-adjusted)	$	—	$	—		$	(1	)	$	(1	)
Futures	—		—			—			—
Mortgage-backed securities forwards	—		(9		)	—			(9		)
Interest rate swaps and swaptions	—		(8		)	—			(8		)
DOJ litigation settlement	—		—			(35		)	(35		)
Contingent consideration	—		—			(10		)	(10		)
Total liabilities at fair value	$	—	$	(17	)	$	(46	)	$	(63	)

	December 31, 2018
	Level 1		Level 2			Level 3			Total Fair Value
	(Dollars in millions)
Investment securities available-for-sale
Agency - Commercial	$	—	$	1,374		$	—		$	1,374
Agency - Residential	—		662			—			662
Municipal obligations	—		32			—			32
Corporate debt obligations	—		42			—			42
Other MBS	—		32			—			32
Loans held-for-sale
Residential first mortgage loans	—		3,732			—			3,732
Loans held-for-investment
Residential first mortgage loans	—		8			—			8
Home equity	—		—			2			2
Mortgage servicing rights	—		—			290			290
Derivative assets
Rate lock commitments (fallout-adjusted)	—		—			20			20
Mortgage-backed securities forwards	—		4			—			4
Interest rate swaps and swaptions	—		23			—			23
Total assets at fair value	$	—	$	5,909		$	312		$	6,221
Derivative liabilities
Futures	$	—	$	(1	)	$	—		$	(1	)
Mortgage-backed securities forwards	—		(31		)	—			(31		)
Interest rate swaps	—		(7		)	—			(7		)
DOJ litigation settlement	—		—			(60		)	(60		)
Contingent consideration	—		—			(6		)	(6		)
Total liabilities at fair value	$	—	$	(39	)	$	(66	)	$	(105	)

Fair Value Measurements Using Significant Unobservable Inputs

The following tables include a roll forward of the Consolidated Statements of Financial Condition amounts (including the change in fair value) for financial instruments classified by us within Level 3 of the valuation hierarchy:

	Balance at Beginning of Year			Total Gains / (Losses) Recorded in Earnings (1)			Purchases / Originations			Sales			Settlement			Transfers In (Out)			Balance at End of Year
	(Dollars in millions)
Year Ended December 31, 2019
Assets
Loans held-for-investment
Home equity	$	2		$	—		$	—		$	—		$	—		$	—		$	2
Mortgage servicing rights (1)	290			(165		)	223			(57		)	—			—			291
Rate lock commitments (net) (1)(2)	20			86			326			—			—			(398		)	34
Totals	$	312		$	(79	)	$	549		$	(57	)	$	—		$	(398	)	$	327
Liabilities
DOJ litigation settlement	$	(60	)	$	25		$	—		$	—		$	—		$	—		$	(35	)
Contingent consideration	(6		)	(7		)	—			—			3			—			(10		)
Totals	$	(66	)	$	18		$	—		$	—		$	3		$	—		$	(45	)
Year Ended December 31, 2018
Assets
Loans held-for-investment
Home equity	$	4		$	—		$	—		$	—		$	(2	)	$	—		$	2
Mortgage servicing rights (1)	291			(18		)	356			(339		)	—			—			290
Rate lock commitments (net) (1)(2)	24			(34		)	235			—			—			(205		)	20
Totals	$	319		$	(52	)	$	591		$	(339	)	$	(2	)	$	(205	)	$	312
Liabilities
DOJ litigation settlement	$	(60	)	$	—		$	—		$	—		$	—		$	—		$	(60	)
Contingent consideration	(25		)	13			—			—			6			—			(6		)
Totals	$	(85	)	$	13		$	—		$	—		$	6		$	—		$	(66	)
Year Ended December 31, 2017
Assets
Loans held-for-sale
Home Equity	$	—		$	1		$	—		$	(52	)	$	(1	)	$	52		$	—
Loans held-for-investment
Home equity	$	65		$	2					$	—		$	(8	)	$	(55	)	$	4
Mortgage servicing rights (1)	335			$	(22	)	288			(310		)							291
Rate lock commitments (net) (1)(2)	18			54			$	267		—			—			(315		)	24
Totals	$	418		$	35		$	555		$	(362	)	$	(9	)	$	(318	)	$	319
Liabilities
DOJ litigation settlement	$	(60	)	$	—		$	—		$	—		$	—		$	—		$	(60	)
Contingent consideration	—			(1		)	(25		)	—			1			—			(25		)
Totals	$	(60	)	$	(1	)	$	(25	)	$	—		$	1		$	—		$	(85	)

(1) We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and rate lock commitments. Gains and losses for individual lines do not reflect the effect of our risk management activities related to such Level 3 instruments.

(2) Rate lock commitments are reported on a fallout adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are transferred to LHFS, which are classified as Level 2 assets.

The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the fair value measurements as of:

	Fair Value			Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in millions)
December 31, 2019
Assets
Loans held-for-investment
Home equity	$	2		Discounted cash flows	Discount rate Constant prepayment rate Constant default rate	7.2% -10.8% (9.0%) 13.0% - 19.5% (16.2%) 2.7%-4.0% (3.3%)	(1)
Mortgage servicing rights	$	291		Discounted cash flows	Option adjusted spread Constant prepayment rate Weighted average cost to service per loan	2.4% - 20.4% (5.3%) 0% - 12.3% (10.6%) $67 - $95 ($84)	(1)
Rate lock commitments (net)	$	34		Consensus pricing	Origination pull-through rate	80.0% - 87.2% (81.5%)	(1)
Liabilities
DOJ litigation settlement	$	(35	)	Discounted cash flows	See description below	See description below
Contingent consideration	$	(10	)	Discounted cash flows	See description below	See description below	(2)

	Fair Value			Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in millions)
December 31, 2018
Assets
Loans held-for-investment
Home equity	$	2		Discounted cash flows	Discount rate Constant prepayment rate Constant default rate	7.2% - 10.8% (9.0%) 13.6% - 20.3% (16.9%) 3.0% - 4.6% (3.8%)	(1)
Mortgage servicing rights	$	290		Discounted cash flows	Option adjusted spread Constant prepayment rate Weighted average cost to service per loan	2.1% - 25.9% (5.4%) 0% - 10.7% (9.6%) $67 - $95 ($86)	(1)
Rate lock commitments (net)	$	20		Consensus pricing	Origination pull-through rate	75.0% - 87.2% (76.8%)	(1)
Liabilities
DOJ litigation settlement	$	(60	)	Discounted cash flows	See description below	See description below
Contingent consideration	$	(6	)	Discounted cash flows	See description below	See description below	(2)

(1) Unobservable inputs were weighted by their relative fair value of the instruments.

(2) Unobservable inputs were not weighted as only one instrument exists.

Recurring Significant Unobservable Inputs

Home equity. The most significant unobservable inputs used in the fair value measurement of the home equity loans are discount rates, constant prepayment rates, and default rates. The constant prepayment and default rates are based on a 12 month historical average. Significant increases (decreases) in the discount rate in isolation result in a significantly lower (higher) fair value measurement. Increases (decreases) in prepay rates in isolation result in a higher (lower) fair value and increases (decreases) in default rates in isolation result in a lower (higher) fair value.

MSRs. The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads, prepayment rates, and cost to service. Significant increases (decreases) in all three assumptions in isolation result in a significantly lower (higher) fair value measurement. Weighted average life (in years) is used to determine the change in fair value of MSRs. For December 31, 2019 and December 31, 2018 the weighted average life (in years) for the entire MSR portfolio was 4.1 and 5.2, respectively.

DOJ litigation settlement. The significant unobservable input used in the fair value measurement of the DOJ litigation settlement are the discount rate, asset growth rate, return on assets, dividend rate, and potential ways we might be required to begin making DOJ liability payments and our estimates of the likelihood of these outcomes, as further discussed in Note 19 - Legal Proceedings, Contingencies and Commitments. The DOJ liability had a fair value adjustment of $25 million for the year ended December 31, 2019. This reduced the liability to $35 million based on changes in the probability of potential ways we might be

required to begin making DOJ liability payments and our estimates of the likelihood of these outcomes. Our assessment of these outcomes reflect a reduced likelihood, and longer timing, for potential future payments.

Rate lock commitments. The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation result in a significantly higher (lower) fair value measurement.

Contingent consideration. The significant unobservable input used in the fair value of the contingent consideration is future forecasted target production volumes and profitability of the division. An increase or decrease to these inputs results in an increase or decrease of the liability.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis 

We also have assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis.

The following table presents assets measured at fair value on a nonrecurring basis:

	Total (1)		Level 2		Level 3		Gains/(Losses)
	(Dollars in millions)
December 31, 2019
Loans held-for-sale (2)	$	6	$	6	$	—	$	(1	)
Impaired loans held-for-investment (2)
Residential first mortgage loans	14		—		14		(5		)
Repossessed assets (3)	10		—		10		(3		)
Totals	$	30	$	6	$	24	$	(9	)
December 31, 2018
Loans held-for-sale (2)	$	5	$	5	$	—	$	(1	)
Impaired loans held-for-investment (2)
Residential first mortgage loans	12		—		12		(4		)
Repossessed assets (3)	7		—		7		(3		)
Totals	$	24	$	5	$	19	$	(8	)

(1) The fair values are determined at various dates during the years ended December 31, 2019 and 2018, respectively.

(2) Gains/(losses) reflect fair value adjustments on assets for which we did not elect the fair value option.

(3) Gains/(losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.

The following tables present the quantitative information about nonrecurring Level 3 fair value financial instruments and the fair value measurements:

	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in millions)
December 31, 2019
Impaired loans held-for-investment
Residential first mortgage loans	$	14	Fair value of collateral	Loss severity discount	25% - 30% (25.9%)	(1)
Repossessed assets	$	10	Fair value of collateral	Loss severity discount	0% - 100% (17.1%)	(1)
December 31, 2018
Impaired loans held-for-investment
Residential first mortgage loans	$	12	Fair value of collateral	Loss severity discount	25% - 30% (28.3%)	(1)
Repossessed assets	$	7	Fair value of collateral	Loss severity discount	0% - 100% (25.8%)	(1)

(1) Unobservable inputs were weighted by their relative fair value of the instruments.

Nonrecurring Significant Unobservable Inputs

The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.

Fair Value of Financial Instruments

The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at fair value, cost, or amortized cost:

	December 31, 2019
				Estimated Fair Value
	Carrying Value			Total			Level 1		Level 2			Level 3
	(Dollars in millions)
Assets
Cash and cash equivalents	$	426		$	426		$	426	$	—		$	—
Investment securities available-for-sale	2,116			2,116			—		2,116			—
Investment securities held-to-maturity	598			599			—		599			—
Loans held-for-sale	5,258			5,258			—		5,258			—
Loans held-for-investment	12,129			12,031			—		10			12,021
Loans with government guarantees	736			707			—		707			—
Mortgage servicing rights	291			291			—		—			291
Federal Home Loan Bank stock	303			303			—		303			—
Bank owned life insurance	349			349			—		349			—
Repossessed assets	10			10			—		—			10
Other assets, foreclosure claims	45			45			—		45			—
Derivative financial instruments	62			88			—		54			34
Liabilities
Retail deposits
Demand deposits and savings accounts	$	(6,811	)	$	(6,050	)	$	—	$	(6,050	)	$	—
Certificates of deposit	(2,353		)	(2,368		)	—		(2,368		)	—
Wholesale deposits	(633		)	(640		)	—		(640		)	—
Government deposits	(1,213		)	(1,156		)	—		(1,156		)	—
Custodial deposits	(4,136		)	(4,066		)	—		(4,066		)	—
Federal Home Loan Bank advances	(4,815		)	(4,816		)	—		(4,816		)	—
Long-term debt	(496		)	(462		)	—		(462		)	—
DOJ litigation settlement	(35		)	(35		)	—		—			(35		)
Contingent consideration	(10		)	(10		)	—		—			(10		)
Derivative financial instruments	(18		)	(44		)	—		(43		)	(1		)

	December 31, 2018
				Estimated Fair Value
	Carrying Value			Total			Level 1		Level 2			Level 3
	(Dollars in millions)
Assets
Cash and cash equivalents	$	408		$	408		$	408	$	—		$	—
Investment securities available-for-sale	2,142			2,142			—		2,142			—
Investment securities held-to-maturity	703			681			—		681			—
Loans held-for-sale	3,869			3,870			—		3,870			—
Loans held-for-investment	9,088			8,966					8			8,958
Loans with government guarantees	392			374					374
Mortgage servicing rights	290			290			—		—			290
Federal Home Loan Bank stock	303			303			—		303			—
Bank owned life insurance	340			340			—		340			—
Repossessed assets	7			7			—		—			7
Other assets, foreclosure claims	50			50			—		50			—
Derivative financial instruments, assets	47			47			—		27			20
Liabilities
Retail deposits
Demand deposits and savings accounts	$	(6,467	)	$	(5,475	)	$	—	$	(5,475	)	$	—
Certificates of deposit	(2,387		)	(2,379		)	—		(2,379		)	—
Wholesale deposits	(583		)	(585		)	—		(585		)	—
Government deposits	(1,202		)	(1,145		)	—		(1,145		)	—
Custodial deposits	(1,741		)	(1,664		)	—		(1,664		)	—
Federal Home Loan Bank advances	(3,394		)	(3,383		)	—		(3,383		)	—
Long-term debt	(495		)	(463		)	—		(463		)	—
DOJ litigation settlement	(60		)	(60		)	—		—			(60		)
Contingent consideration	(6		)	(6		)	—		—			(6		)
Derivative financial instruments, liabilities	(39		)	(39		)	—		(39		)	—

Fair Value Option

We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements primarily to more closely align the accounting method with the underlying economic exposure. Interest income on LHFS is accrued on the principal outstanding primarily using the "simple-interest" method.

The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected:

	For the Years Ended December 31,
	2019		2018			2017
	(Dollars in millions)
Assets
Loans held-for-sale
Net gain on loan sales	$	348	$	(29	)	$	283
Loans held-for-investment
Other noninterest income	1		—			1
Liabilities
DOJ litigation settlement
Other noninterest income	25		—			—

The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding for assets and liabilities for which the fair value option has been elected:

	December 31, 2019									December 31, 2018
	Unpaid Principal Balance			Fair Value			Fair Value Over / (Under) Unpaid Principal Balance			Unpaid Principal Balance			Fair Value			Fair Value Over / (Under) Unpaid Principal Balance
	(Dollars in millions)
Assets
Nonaccrual loans
Loans held-for-sale	$	3		$	3		$	—		$	6		$	6		$	—
Loans held-for-investment	5			4			(1		)	4			3			(1		)
Total nonaccrual loans	8			7			(1		)	10			9			(1		)
Other performing loans
Loans held-for-sale	5,057			5,216			159			3,601			3,726			125
Loans held-for-investment	8			8			—			8			7			(1		)
Total other performing loans	5,065			5,224			159			3,609			3,733			124
Total loans
Loans held-for-sale	5,060			5,219			159			3,607			3,732			125
Loans held-for-investment	13			12			(1		)	12			10			(2		)
Total loans	$	5,073		$	5,231		$	158		$	3,619		$	3,742		$	123
Liabilities
Litigation settlement (1)	$	(118	)	$	(35	)	$	83		$	(118	)	$	(60	)	$	58

(1)

We are obligated to pay $118 million in installment payments upon meeting certain performance conditions, as described in Note 19 - Legal Proceedings, Contingencies and Commitments.