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 15 – Fair Value of Assets & Liabilities, the “Determination of Fair Value” section for a discussion of FHN's MSR valuation methodology and Note 14 – Derivatives for a discussion of how FHN hedges the fair value of MSR. The balance of MSR included on the Consolidated Condensed Statements of Condition represents the rights to service approximately $20 billion and $25 billion of mortgage loans on September 30, 2012 and 2011, respectively, for which a servicing right has been capitalized.

Following is a summary of changes in capitalized MSR as of September 30, 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		(17,972)		(31)		(161)		(18,164)
Reductions due to exercise of cleanup calls		(195)		-		-		(195)
Changes in fair value due to:
Changes in valuation model inputs or assumptions		(38,230)		-		-		(38,230)
Other changes in fair value		16		10		47		73
Fair value on September 30, 2011	$	147,431	$	241	$	3,131	$	150,803
Fair value on January 1, 2012	$	140,724	$	231	$	3,114	$	144,069
Reductions due to loan payments		(18,214)		(26)		(257)		(18,497)
Reductions due to exercise of cleanup calls		(494)		-		-		(494)
Changes in fair value due to:
Changes in valuation model inputs or assumptions		(4,503)		-		-		(4,503)
Other changes in fair value		(73)		-		35		(38)
Fair value on September 30, 2012	$	117,440	$	205	$	2,892	$	120,537

Servicing, late, and other ancillary fees recognized within mortgage banking income were $13.8 million and $16.7 million for the three months ended September 30, 2012 and 2011, respectively, and $46.0 million and $56.8 million for the nine months ended September 30, 2012 and 2011, respectively. 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 $1.7 million and $2.8 million at September 30, 2012 and 2011, respectively. The aggregate principal balance serviced by FHN for these transactions was $.4 billion and $.5 billion at September 30, 2012 and 2011, respectively. 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 September 30, 2012 and 2011, FHN had $11.6 million and $15.8 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 Condensed Statements of Condition.