MORTGAGE BANKING

In its mortgage banking business, the Company sells residential mortgages to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. The Company retains no beneficial interests in these sales, but may retain the servicing rights of the loans sold. The Company is obligated to subsequently repurchase a loan if the purchaser discovers a standard representation or warranty violation such as noncompliance with eligibility requirements, customer fraud, or servicing violations. This primarily occurs during a loan file review.

The Company received $2.7 billion, $1.6 billion, and $4.2 billion of proceeds from the sale of residential mortgages for the years ended December 31, 2015, 2014 and 2013, respectively, and recognized gains on such sales of $51 million, $36 million, and $66 million for the years ended December 31, 2015, 2014 and 2013, respectively. Pursuant to the standard representations and warranties obligations discussed in the preceding paragraph, the Company repurchased residential mortgage loans totaling $10 million, $25 million, and $35 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Mortgage servicing fees, a component of mortgage banking income, were $55 million, $59 million, and $61 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company recorded valuation recoveries of $9 million, $5 million, and $47 million for its MSRs for the years ended December 31, 2015, 2014 and 2013, respectively.

Changes related to MSRs were as follows:



	As of and for the Year Ended December 31,
(in millions)	2015			2014
MSRs:
Balance as of January 1		$184			$208
Amount capitalized	26			17
Amortization	(37		)	(41		)
Carrying amount before valuation allowance	173			184
Valuation allowance for servicing assets:
Balance as of January 1	18			23
Valuation recovery	(9		)	(5		)
Balance at end of period	9			18
Net carrying value of MSRs		$164			$166

MSRs are presented in other assets on the Consolidated Balance Sheets.

The fair value of MSRs is estimated using a valuation model that calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, contractual servicing fee income, servicing costs, default rates, ancillary income, and other economic factors, which are determined based on current market conditions. The valuation model uses a static discounted cash flow methodology incorporating current market interest rates. A static model does not attempt to forecast or predict the future direction of interest rates; rather it estimates the amount and timing of future servicing cash flows using current market interest rates. The current mortgage interest rate influences the expected prepayment rate and therefore, the length of the cash flows associated with the servicing asset, while the discount rate determines the present value of those cash flows. Expected mortgage loan prepayment assumptions are obtained using the QRM Multi Component prepayment model. The Company periodically obtains third-party valuations of its MSRs to assess the reasonableness of the fair value calculated by the valuation model.

The key economic assumptions used to estimate the value of MSRs are presented in the following table:



	December 31,
(dollars in millions)	2015	2014
Fair value	$178	$179
Weighted average life (in years)	5.4	5.2
Weighted average constant prepayment rate	11.6%	12.4%
Weighted average discount rate	9.7%	9.8%

The key economic assumptions used in estimating the fair value of MSRs capitalized during the period were as follows:



	Year Ended December 31,
	2015	2014	2013
Weighted average life (in years)	5.9	5.8	6.0
Weighted average constant prepayment rate	10.7%	11.7%	12.4%
Weighted average discount rate	9.7%	10.3%	10.5%

The sensitivity analysis below as of December 31, 2015 and 2014 presents the impact to current fair value of an immediate 50 basis points and 100 basis points adverse change in the key economic assumptions and presents the decline in fair value that would occur if the adverse change were realized. These sensitivities are hypothetical. The effect of a variation in a particular assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in interest rates, which drive changes in prepayment speeds, could result in changes in the discount rates), which might amplify or counteract the sensitivities. The primary risk inherent in the Company’s MSRs is an increase in prepayments of the underlying mortgage loans serviced, which is dependent upon market movements of interest rates.



	December 31,
(in millions)	2015		2014
Prepayment rate:
Decline in fair value from a 50 basis point decrease in interest rates		$5		$9
Decline in fair value from a 100 basis point decrease in interest rates		$11		$15
Weighted average discount rate:
Decline in fair value from a 50 basis point increase in weighted average discount rate		$3		$3
Decline in fair value from a 100 basis point increase in weighted average discount rate		$6		$6