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 and servicing.

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



	Quarter ended June 30,						Six months ended June 30,
(in millions)	2011			2010			2011			2010

Fair value, beginning of period	$	15,648			15,544			14,467			16,004
Adjustments from adoption of consolidation accounting guidance		-			-			-			(118	)
Servicing from securitizations or asset transfers		740			943			2,002			1,997


Net additions		740			943			2,002			1,879


Changes in fair value:
Due to changes in valuation model inputs or assumptions (1)		(1,075	)		(2,661	)		(576	)		(3,438	)
Other changes in fair value (2)		(535	)		(575	)		(1,115	)		(1,194	)


Total changes in fair value		(1,610	)		(3,236	)		(1,691	)		(4,632	)


Fair value, end of period	$	14,778			13,251			14,778			13,251


(1)		Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates, and costs to service, including delinquency and foreclosure costs.

(2)		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)	2011			2010			2011			2010

Balance, beginning of period	$	1,432			1,069			1,422			1,119
Adjustments from adoption of consolidation accounting guidance		-			-			-			(5	)
Purchases		36			7			81			8
Servicing from securitizations or asset transfers		27			17			56			28
Amortization		(63	)		(56	)		(127	)		(113	)


Balance, end of period (1)		1,432			1,037			1,432			1,037


Valuation allowance:
Balance, beginning of period		(9	)		-			(3	)		-
Provision for MSRs in excess of fair value		(1	)		-			(7	)		-


Balance, end of period (2)		(10	)		-			(10	)		-


Amortized MSRs, net	$	1,422			1,037			1,422			1,037


Fair value of amortized MSRs:
Beginning of period	$	1,898			1,283			1,812			1,261
End of period (3)		1,805			1,307			1,805			1,307


(1)		Includes $379 million in residential amortized MSRs at June 30, 2011. The June 30, 2010, balance is commercial amortized MSRs. For the quarter and first half of 2011, the residential MSR amortization was $(11) million and $(21) million, respectively.

(2)		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. Residential amortized MSRs are evaluated for impairment purposes by the following risk strata: Mortgages sold to GSEs (FHLMC and FNMA) and mortgages sold to GNMA, each by interest rate stratifications. A valuation allowance of $10 million was recorded on the residential amortized MSRs at June 30, 2011.

(3)		Includes fair value of $410 million in residential amortized MSRs and $1,395 million in commercial amortized MSRs at June 30, 2011.

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.



	June 30,			Dec. 31,
(in billions)	2011			2010

Residential mortgage servicing:
Serviced for others	$	1,464			1,429
Owned loans serviced		338			371
Subservicing		8			9


Total residential servicing		1,810			1,809


Commercial mortgage servicing:
Serviced for others		402			408
Owned loans serviced		101			99
Subservicing		14			13


Total commercial servicing		517			520


Total managed servicing portfolio	$	2,327			2,329


Total serviced for others	$	1,866			1,837
Ratio of MSRs to related loans serviced for others		0.87	%		0.86

The components of mortgage banking noninterest income were:



	Quarter ended June 30,						Six months ended June 30,
(in millions)	2011			2010			2011			2010

Servicing income, net:
Servicing fees:
Contractually specified servicing fees	$	1,175			1,154			2,320			2,261
Late charges		75			88			169			178
Ancillary fees		74			111			163			217
Unreimbursed direct servicing costs (1)		(222	)		(130	)		(413	)		(380	)


Net servicing fees		1,102			1,223			2,239			2,276
Changes in fair value of MSRs carried at fair value:
Due to changes in valuation model inputs or assumptions (2)		(1,075	)		(2,661	)		(576	)		(3,438	)
Other changes in fair value (3)		(535	)		(575	)		(1,115	)		(1,194	)


Total changes in fair value of MSRs carried at fair value		(1,610	)		(3,236	)		(1,691	)		(4,632	)
Amortization		(63	)		(56	)		(127	)		(113	)
Provision for MSRs in excess of fair value		(1	)		—			(7	)		—
Net derivative gains from economic hedges (4)		1,449			3,287			1,329			5,053


Total servicing income, net		877			1,218			1,743			2,584
Net gains on mortgage loan origination/sales activities		742			793			1,892			1,897


Total mortgage banking noninterest income	$	1,619			2,011			3,635			4,481


Market-related valuation changes to MSRs, net of hedge results (2) + (4)	$	374			626			753			1,615


(1)		Primarily associated with foreclosure expenses and other interest costs.

(2)		Principally reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates and costs to service, including delinquency and foreclosure costs.

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

(4)		Represents results from free-standing derivatives (economic hedges) used to hedge the risk of changes in fair value of MSRs. See Note 12 – Free-Standing Derivatives 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 financial statements and the provision for repurchase losses reduces net gains on mortgage loan origination/sales activities. Because the level of mortgage loan repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, the level of the liability for mortgage loan repurchase losses is difficult to estimate and requires considerable management judgment. We maintain regular contact with the GSEs and other significant investors to monitor and address their repurchase demand practices and concerns. 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 are 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 $1.8 billion at June 30, 2011, and was determined based upon modifying the assumptions 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)	2011			2010			2011			2010

Balance, beginning of period	$	1,207			1,263			1,289			1,033
Provision for repurchase losses:
Loan sales		20			36			55			80
Change in estimate – primarily due to credit deterioration		222			346			436			704


Total additions		242			382			491			784
Losses		(261	)		(270	)		(592	)		(442	)


Balance, end of period	$	1,188			1,375			1,188			1,375