FHN recognizes all classes of mortgage servicing rights (“MSR”) at fair value. Classes of MSR are established based on market inputs used to determine the fair value of the servicing asset and FHN's risk management practices. See Note 22 – Fair Value of Assets & Liabilities, the “Determination of Fair Value” section for a discussion of FHN's MSR valuation methodology and Note 25 – Derivatives for a discussion of how FHN hedges the fair value of MSR. The balance of MSR included on the Consolidated Statements of Condition represents the rights to service approximately $19 billion and $24 billion of mortgage loans on December 31, 2012 and 2011, respectively, for which a servicing right has been capitalized.

Following is a summary of changes in capitalized MSR as of December 31, 2012 and 2011:


(Dollars in thousands)	First Liens		Second Liens		HELOC		Total
Fair value on January 1, 2011	$	203,812	$	262	$	3,245	$	207,319
Reductions due to loan payments		(21,539)		(41)		(215)		(21,795)
Reductions due to exercise of cleanup calls		(195)		-		-		(195)
Changes in fair value due to:
Changes in valuation model inputs or assumptions		(41,370)		-		-		(41,370)
Other changes in fair value		16		10		84		110
Fair value on December 31, 2011	$	140,724	$	231	$	3,114	$	144,069
Reductions due to loan payments		(23,806)		(35)		(348)		(24,189)
Reductions due to exercise of cleanup calls		(494)		-		-		(494)
Changes in fair value due to:
Changes in valuation model inputs or assumptions		(5,072)		-		-		(5,072)
Other changes in fair value		(38)		-		35		(3)
Fair value on December 31, 2012	$	111,314	$	196	$	2,801	$	114,311

Servicing, late, and other ancillary fees recognized within mortgage banking income were $58.9 million, $70.2 million, and $92.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Servicing, late, and other ancillary fees recognized within other income and commissions were $2.0 million, $2.4 million, and $3.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.

The total value of MSR declined $29.8 million during 2012 compared to a decline of $63.3 million in 2011. Mortgage rates continued to decline during 2012, but at a slower pace than 2011 resulting in continued elevated prepayment speed assumptions and corresponding decreases in MSR value of $5.1 million and $41.3 million, respectively. In the third quarter of 2012 and second quarter of 2011, FHN exercised cleanup calls related to proprietary securitization trusts that had previously been securitized with servicing retained. Upon exercise, the associated mortgage loans were repurchased and are now included on the Consolidated Statements of Condition. Accordingly, FHN derecognized the remaining MSR associated with these loans. The remaining declines in MSR are attributable to natural run-off.

FHN services a portfolio of mortgage loans related to transfers by other parties utilizing securitization trusts. The servicing assets represent FHN's sole interest in these transactions. The total MSR recognized by FHN related to these transactions was $1.5 million and $2.6 million at December 31, 2012 and 2011, respectively. The aggregate principal balance serviced by FHN for these transactions was $.3 billion at December 31, 2012 and $.4 billion at December 31, 2011. FHN has no obligation to provide financial support and has not provided any form of support to the related trusts. The MSR recognized by FHN has been included in the first lien mortgage loans column within the rollforward of MSR.

In prior periods, FHN transferred MSR to third parties in transactions that did not qualify for sales treatment due to certain recourse provisions that were included within the sale agreements. On December 31, 2012 and 2011, FHN had $11.2 million and $14.8 million, respectively, of MSR related to these transactions. These MSR are included within the first liens mortgage loans column within the rollforward of MSR. The proceeds from these transfers have been recognized within Other short-term borrowings in the Consolidated Statements of Condition.