Note 7

Mortgage Servicing Rights

The Company serviced $224.6 billion of residential mortgage loans for others at September 30, 2014, and $226.8 billion at December 31, 2013, 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 $49 million and $108 million for the three months ended September 30, 2014 and 2013, respectively, and net gains of $200 million (of which $44 million related to excess servicing rights sold during the second quarter of 2014) and $163 million for the nine months ended September 30, 2014 and 2013, respectively. Loan servicing fees, not including valuation changes, included in mortgage banking revenue, were $178 million and $192 million for the three months ended September 30, 2014 and 2013, respectively, and $551 million and $566 million for the nine months ended September 30, 2014 and 2013, respectively.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions)	2014			2013			2014			2013
Balance at beginning of period	$	2,412		$	2,377		$	2,680		$	1,700
Rights purchased		1			2			3			7
Rights capitalized		109			187			264			674
Rights sold		–			–			(141	)		–
Changes in fair value of MSRs
Due to fluctuations in market interest rates (a)		29			71			(129	)		503
Due to revised assumptions or models (b)		15			42			71			33
Other changes in fair value (c)		(105	)		(102	)		(287	)		(340	)
Balance at end of period	$	2,461		$	2,577		$	2,461		$	2,577

(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 discount rate, 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:


	September 30, 2014																		December 31, 2013
		Down			Down			Down			Up			Up			Up			Down			Down			Down			Up			Up			Up
(Dollars in Millions)	100 bps			50 bps			25 bps			25 bps			50 bps			100 bps			100 bps			50 bps			25 bps			25 bps			50 bps			100 bps
MSR portfolio	$	(490	)	$	(212	)	$	(99	)	$	84		$	157		$	297		$	(435	)	$	(199	)	$	(93	)	$	82		$	154		$	287
Derivative instrument hedges		391			196			94			(87	)		(167	)		(319	)		399			194			91			(82	)		(157	)		(301	)
Net sensitivity	$	(99	)	$	(16	)	$	(5	)	$	(3	)	$	(10	)	$	(22	)	$	(36	)	$	(5	)	$	(2	)	$	–		$	(3	)	$	(14	)

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 Mortgage Revenue Bond Programs (“MRBP”). The servicing portfolios are predominantly comprised of fixed-rate agency loans with limited adjustable-rate or jumbo mortgage loans. The MRBP 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:


	September 30, 2014												December 31, 2013
(Dollars in Millions)	MRBP			Government			Conventional (b)			Total			MRBP			Government			Conventional (b)			Total
Servicing portfolio	$	18,052		$	40,600		$	163,757		$	222,409		$	15,896		$	41,659		$	169,287		$	226,842
Fair value	$	199		$	469		$	1,793		$	2,461		$	180		$	500		$	2,000		$	2,680
Value (bps) (a)		110			116			109			111			113			120			118			118
Weighted-average servicing fees (bps)		37			33			27			29			39			32			29			30
Multiple (value/servicing fees)		2.97			3.52			4.04			3.83			2.90			3.75			4.07			3.93
Weighted-average note rate		4.62	%		4.20	%		4.15	%		4.20	%		4.70	%		4.24	%		4.17	%		4.22	%
Weighted-average age (in years)		3.7			3.1			3.0			3.1			3.8			2.6			2.5			2.6
Weighted-average expected prepayment (constant prepayment rate)		12.9	%		12.4	%		10.6	%		11.1	%		13.5	%		11.5	%		10.9	%		11.2	%
Weighted-average expected life (in years)		6.2			6.4			7.0			6.8			6.2			6.9			7.2			7.1
Weighted-average discount rate		11.9	%		11.2	%		9.6	%		10.1	%		11.9	%		11.2	%		9.8	%		10.2	%

(a)

Value is calculated as fair value divided by the servicing portfolio.

(b)

Represents loans sold primarily to GSEs.