Servicing Activities

9 Months Ended

Sep. 30, 2011

Servicing Activities [Abstract]

Servicing Activities

11. Servicing Activities

Mortgage Servicing Rights

The following table summarizes activity related to MSRs, which are carried at fair value.

Three months ended September 30, ($ in millions)	2011			2010
Estimated fair value at July 1,	$	3,701		$	2,983
Additions recognized on sale of mortgage loans		159			260
Additions from purchases of servicing rights		15			24
Changes in fair value
Due to changes in valuation inputs or assumptions used in the valuation model		(1,106	)		(278	)
Other changes in fair value		(106	)		(244	)
Other changes that affect the balance		—			1
Estimated fair value at September 30,	$	2,663		$	2,746
Nine months ended September 30, ($ in millions)	2011			2010
Estimated fair value at January 1,	$	3,738		$	3,554
Additions recognized on sale of mortgage loans		487			628
Additions from purchases of servicing rights		31			45
Subtractions from disposition of servicing assets		(266	)		—
Changes in fair value
Due to changes in valuation inputs or assumptions used in the valuation model		(943	)		(772	)
Other changes in fair value		(384	)		(694	)
Decrease due to change in accounting principle		—			(19	)
Other changes that affect the balance		—			4
Estimated fair value at September 30,	$	2,663		$	2,746

Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model include all changes due to a revaluation by a model or by a benchmarking exercise. Other changes in fair value primarily include the accretion of the present value of the discount related to forecasted cash flows and the economic runoff of the portfolio. The decrease due to change in accounting principle reflects the effect of the initial adoption of ASU 2009-17.

The key economic assumptions and sensitivity of the fair value of MSRs to immediate 10% and 20% adverse changes in those assumptions were as follows.

($ in millions)	September 30, 2011			December 31, 2010
Weighted average life (in years)		5.7			7.0
Weighted average prepayment speed		12.7	%		9.8	%
Impact on fair value of 10% adverse change	$	(118	)	$	(155	)
Impact on fair value of 20% adverse change		(225	)		(295	)
Weighted average discount rate		13.4	%		12.3	%
Impact on fair value of 10% adverse change	$	(85	)	$	(80	)
Impact on fair value of 20% adverse change		(164	)		(156	)

These sensitivities are hypothetical and should be considered with caution. Changes in fair value based on a 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., increased market interest rates may result in lower prepayments and increased credit losses) that could magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected change in the fair value of the instruments used to manage the interest rates and prepayment risks associated with these assets.

Risk Mitigation Activities

The primary risk of our servicing rights is interest rate risk and the resulting impact on prepayments. A significant decline in interest rates could lead to higher-than-expected prepayments that could reduce the value of the MSRs. We economically hedge the impact of these risks with both derivative and nonderivative financial instruments. Refer to Note 19 for additional information regarding the derivative financial instruments used to economically hedge MSRs.

The components of servicing valuation and hedge activities, net, were as follows.

	Three months  ended September 30,						Nine months  ended September 30,
($ in millions)	2011			2010			2011			2010
Change in estimated fair value of mortgage servicing rights	$	(1,212	)	$	(522	)	$	(1,327	)	$	(1,466	)
Change in fair value of derivative financial instruments		741			495			664			1,285
Servicing valuation and hedge activities, net	$	(471	)	$	(27	)	$	(663	)	$	(181	)

Mortgage Servicing Fees

The components of mortgage servicing fees were as follows.

	Three months  ended September 30,				Nine months  ended September 30,
($ in millions)	2011		2010		2011		2010
Contractual servicing fees, net of guarantee fees and including subservicing	$	258	$	270	$	786	$	793
Late fees		11		17		48		56
Ancillary fees		43		56		115		146
Total mortgage servicing fees	$	312	$	343	$	949	$	995

Mortgage Servicing Advances

In connection with our primary servicing activities (i.e., servicing of mortgage loans), we make certain payments of property taxes and insurance premiums, default and property maintenance payments, as well as advances of principal and interest payments before collecting them from individual borrowers. Servicing advances including contractual interest are priority cash flows in the event of a loan principal reduction or foreclosure and ultimate liquidation of the real estate-owned property, thus making their collection reasonably assured. These servicing advances are included in other assets on the Condensed Consolidated Balance Sheet and totaled $1.8 billion and $1.9 billion at September 30, 2011, and December 31, 2010, respectively. We maintain an allowance for uncollected primary servicing advances of $21 million and $25 million at September 30, 2011, and December 31, 2010, respectively. Our potential obligation is influenced by the loan's performance and credit quality.

When we act as a subservicer of mortgage loans we perform the responsibilities of a primary servicer but do not own the corresponding primary servicing rights. We receive a fee from the primary servicer for such services. As the subservicer, we would have the same responsibilities of a primary servicer in that we would make certain payments of property taxes and insurance premiums, default and property maintenance, as well as advances of principal and interest payments before collecting them from individual borrowers. At September 30, 2011, and December 31, 2010, outstanding servicer advances related to subserviced loans were $118 million and $140 million, respectively, and we had a reserve for uncollected subservicer advances of $2 million and $1 million, respectively.

In many cases, where we act as master servicer, we also act as primary servicer. In connection with our master-servicing activities, we service the mortgage-backed and mortgage-related asset-backed securities and whole-loan packages sold to investors. As the master servicer, we collect mortgage loan payments from primary servicers and distribute those funds to investors in the mortgage-backed and mortgage-related asset-backed securities and whole-loan packages. As the master servicer, we are required to advance scheduled payments to the securitization trust or whole-loan investors. To the extent the primary servicer does not advance the payments, we are responsible for advancing the payment to the trust or whole-loan investors. Master-servicing advances, including contractual interest, are priority cash flows in the event of a default, thus making their collection reasonably assured. In most cases, we are required to advance these payments to the point of liquidation of the loan or reimbursement of the trust or whole-loan investors. We had outstanding master-servicing advances of $142 million and $90 million at September 30, 2011, and December 31, 2010, respectively. We had no reserve for uncollected master-servicing advances at September 30, 2011, or December 31, 2010.

Serviced Mortgage Assets

The unpaid principal balance of our serviced mortgage assets was as follows.

($ in millions)	September 30, 2011		December 31, 2010
On-balance sheet mortgage loans
Held-for-sale and investment	$	18,968	$	20,224
Off-balance sheet mortgage loans
Loans sold to third-party investors
Private-label		56,120		63,685
GSEs		265,370		255,388
Whole-loan		17,033		17,524
Purchased servicing rights		3,407		3,946
Total primary serviced mortgage loans		360,898		360,767
Subserviced mortgage loans		25,126		24,173
Master-servicing-only mortgage loans		8,931		10,548
Total serviced mortgage loans	$	394,955	$	395,488

Our Mortgage operations that conduct primary and master-servicing activities are required to maintain certain servicer ratings in accordance with master agreements entered into with GSEs. At September 30, 2011, our Mortgage operations were in compliance with the servicer-rating requirements of the master agreements.

In certain domestic securitizations of our Mortgage operations, the surety or other provider of contractual credit support is entitled to declare a servicer default and terminate the servicer upon the failure of the loans to meet certain portfolio delinquency and/or cumulative-loss thresholds. Our Mortgage operations did not receive notice of termination from surety providers during the nine months ended September 30, 2011.

Automobile Servicing Activities

We service consumer automobile contracts. Historically, we have sold a portion of our consumer automobile contracts. With respect to contracts we sell, we retain the right to service and earn a servicing fee for our servicing function. Typically, we conclude that the fee we are paid for servicing consumer automobile finance receivables represents adequate compensation, and consequently, we do not recognize a servicing asset or liability. We recognized automobile servicing fees of $39 million and $126 million for the three months and nine months ended September 30, 2011, respectively, compared to $61 million and $178 million for the three months and nine months ended September 30, 2010.

Automobile Serviced Assets

The total serviced automobile loans outstanding were as follows.

($ in millions)	September 30, 2011		December 31, 2010
On-balance sheet automobile loans
Consumer automobile	$	60,169	$	51,254
Commercial automobile		34,713		35,629
Operating leases		9,052		9,128
Operations held-for-sale		5		242
Off-balance sheet automobile loans
Loans sold to third-party investors
Whole-loan		14,735		18,126
Other		1,118		979
Total serviced automobile loans	$	119,792	$	115,358