Note 8: Mortgage Banking Activities

Mortgage banking activities, included in the Community Banking and Wholesale Banking operating segments, consist of residential and commercial mortgage originations, sale activity and servicing.

We apply the amortization method to commercial MSRs and apply the fair value method to residential MSRs. The changes in MSRs measured using the fair value method were:



	Quarter ended June 30,					Six months ended June 30,
(in millions)	2015			2014		2015		2014
Fair value, beginning of period	$	11,739		14,953		12,738		15,580
Servicing from securitizations or asset transfers	428			271		736		560
Sales and other reductions	(5		)	—		(6	)	—
Net additions	423			271		730		560
Changes in fair value:
Due to changes in valuation model inputs or assumptions:
Mortgage interest rates (1)	1,117			(876	)	545		(1,385	)
Servicing and foreclosure costs (2)	(10		)	23		(28	)	(11	)
Discount rates (3)	—			(55	)	—		(55	)
Prepayment estimates and other (4)	(54		)	73		(237	)	175
Net changes in valuation model inputs or assumptions	1,053			(835	)	280		(1,276	)
Other changes in fair value (5)	(554		)	(489	)	(1,087	)	(964	)
Total changes in fair value	499			(1,324	)	(807	)	(2,240	)
Fair value, end of period	$	12,661		13,900		12,661		13,900


(1)	Includes prepayment speed changes as well as other valuation changes due to changes in mortgage interest rates (such as changes in estimated interest earned on custodial deposit balances).


(2)	Includes costs to service and unreimbursed foreclosure costs.


(3)	Reflects discount rate assumption change, excluding portion attributable to changes in mortgage interest rates.


(4)	Represents changes driven by other valuation model inputs or assumptions including prepayment speed estimation changes and other assumption updates. Prepayment speed estimation changes are influenced by observed changes in borrower behavior and other external factors that occur independent of interest rate changes.


(5)	Represents changes due to collection/realization of expected cash flows over time.

The changes in amortized MSRs were:



	Quarter ended June 30,					Six months ended June 30,
(in millions)	2015			2014		2015		2014
Balance, beginning of period	$	1,252		1,219		1,242		1,229
Purchases	29			32		51		72
Servicing from securitizations or asset transfers	46			24		96		38
Amortization	(65		)	(79	)	(127	)	(143	)
Balance, end of period (1)	$	1,262		1,196		1,262		1,196
Fair value of amortized MSRs:
Beginning of period	$	1,522		1,624		1,637		1,575
End of period	1,692			1,577		1,692		1,577


(1)	Commercial amortized MSRs are evaluated for impairment purposes by the following risk strata: agency (GSEs) and non-agency. There was no valuation allowance recorded for the periods presented on the commercial amortized MSRs.

We present the components of our managed servicing portfolio in the following table at unpaid principal balance for loans serviced and subserviced for others and at book value for owned loans serviced.



(in billions)	Jun 30, 2015			Dec 31, 2014
Residential mortgage servicing:
Serviced for others	$	1,344		1,405
Owned loans serviced	347			342
Subserviced for others	5			5
Total residential servicing	1,696			1,752
Commercial mortgage servicing:
Serviced for others	465			456
Owned loans serviced	120			112
Subserviced for others	7			7
Total commercial servicing	592			575
Total managed servicing portfolio	$	2,288		2,327
Total serviced for others	$	1,809		1,861
Ratio of MSRs to related loans serviced for others	0.77		%	0.75

The components of mortgage banking noninterest income were:



	Quarter ended June 30,					Six months ended June 30,
(in millions)	2015			2014		2015		2014
Servicing income, net:
Servicing fees:
Contractually specified servicing fees	$	1,008		1,077		2,028		2,159
Late charges	46			48		99		104
Ancillary fees	81			87		152		167
Unreimbursed direct servicing costs (1)	(109		)	(84	)	(243	)	(232	)
Net servicing fees	1,026			1,128		2,036		2,198
Changes in fair value of MSRs carried at fair value:
Due to changes in valuation model inputs or assumptions (2)	1,053			(835	)	280		(1,276	)
Other changes in fair value (3)	(554		)	(489	)	(1,087	)	(964	)
Total changes in fair value of MSRs carried at fair value	499			(1,324	)	(807	)	(2,240	)
Amortization	(65		)	(79	)	(127	)	(143	)
Net derivative gains (losses) from economic hedges (4)	(946		)	1,310		(65	)	2,158
Total servicing income, net	514			1,035		1,037		1,973
Net gains on mortgage loan origination/sales activities	1,191			688		2,215		1,260
Total mortgage banking noninterest income	$	1,705		1,723		3,252		3,233
Market-related valuation changes to MSRs, net of hedge results (2) + (4)	$	107		475		215		882


(1)	Primarily associated with foreclosure expenses and unreimbursed interest advances to investors.


(2)	Refer to the changes in fair value of MSRs table in this Note for more detail.


(3)	Represents changes due to collection/realization of expected cash flows over time.


(4)	Represents results from economic hedges used to hedge the risk of changes in fair value of MSRs. See Note 12 (Derivatives Not Designated as Hedging Instruments) for additional discussion and detail.

The table below summarizes the changes in our liability for mortgage loan repurchase losses. This liability is in “Accrued expenses and other liabilities” in our consolidated balance sheet and the provision for repurchase losses reduces net gains on mortgage loan origination/sales activities in “Mortgage banking” in our consolidated income statement.

Because of the uncertainty in the various estimates underlying the mortgage repurchase liability, there is a range of losses in excess of the recorded mortgage repurchase liability that is reasonably possible. The estimate of the range of possible loss for representations and warranties does not represent a probable loss, and is based on currently available information, significant judgment, and a number of assumptions that are subject to change. The high end of this range of reasonably possible losses in excess of our recorded liability was $934 million at June 30, 2015, and was determined based upon modifying the assumptions (particularly to assume significant changes in investor repurchase demand practices) utilized in our best estimate of probable loss to reflect what we believe to be the high end of reasonably possible adverse assumptions.



	Quarter ended June 30,					Six months ended June 30,
(in millions)	2015			2014		2015		2014
Balance, beginning of period	$	586		799		615		899
Provision for repurchase losses:
Loan sales	13			12		23		22
Change in estimate (1)	(31		)	(38	)	(57	)	(42	)
Net additions (reductions)	(18		)	(26	)	(34	)	(20	)
Losses	(11		)	(7	)	(24	)	(113	)
Balance, end of period	$	557		766		557		766


(1)	Results from changes in investor demand, mortgage insurer practices, credit and the financial stability of correspondent lenders.