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 for 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 proceeds from the sale of residential mortgages held for sale of $753 million and $725 million for the three months ended September 30, 2016 and 2015, respectively, and $1.8 billion and $1.5 billion for the nine months ended September 30, 2016 and 2015, respectively.

The Company recognized gains on sales of residential mortgages held for sale of $26 million and $11 million for the three months ended September 30, 2016 and 2015, respectively, and $56 million and $43 million for the nine months ended September 30, 2016 and 2015, respectively.

Pursuant to the standard representations and warranties obligations discussed above, the Company repurchased residential mortgages totaling $2 million for the three months ended September 30, 2016 and 2015 and $6 million and $9 million for the nine months ended September 30, 2016 and 2015, respectively.

Mortgage servicing fees, a component of mortgage banking fees, were $12 million and $13 million for the three months ended September 30, 2016 and 2015, respectively, and $38 million and $41 million for the nine months ended September 30, 2016 and 2015, respectively.

The Company recorded valuation charge-offs of $2 million and $1 million for its MSRs for the three months ended September 30, 2016 and 2015, respectively, and valuation charge-offs of $6 million and recoveries of $6 million for its MSRs for the nine months ended September 30, 2016 and 2015, respectively.

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.

MSRs are presented in other assets on the Consolidated Balance Sheets. Changes related to MSRs are presented below:



	As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,
(in millions)	2016			2015			2016			2015
MSRs:
Balance as of beginning of period		$166			$177			$173			$184
Amount capitalized	10			7			20			20
Amortization	(9		)	(8		)	(26		)	(28		)
Carrying amount before valuation allowance	167			176			167			176
Valuation allowance for servicing assets:
Balance as of beginning of period	13			11			9			18
Valuation charge-offs (recoveries)	2			1			6			(6		)
Balance at end of period	15			12			15			12
Net carrying value of MSRs		$152			$164			$152			$164

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



	September 30, 2016					December 31, 2015
(dollars in millions)	Weighted Average	Range				Weighted Average	Range
Fair value	$163	Min		Max		$178	Min		Max
Weighted average life (in years)	4.8	2.5		5.2		5.4	2.8		6.2
Weighted average constant prepayment rate	14.0%	13.6	%	24.8	%	11.6%	10.7	%	22.2	%
Weighted average discount rate	9.7%	9.1	%	12.1	%	9.7%	9.1	%	12.1	%

The key economic assumptions used in estimating the fair value of MSRs capitalized during the period are presented below:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Weighted average life (in years)	5.7	6.4	5.9	5.7
Weighted average constant prepayment rate	12.3%	10.1%	11.7%	10.8%
Weighted average discount rate	9.8%	9.7%	9.8%	9.7%

The sensitivity analysis below 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, with the effect of a variation in a particular assumption on the fair value of the mortgage servicing rights 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 rates, could result in changes in the discount rates), which may 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.



(in millions)	September 30, 2016		December 31, 2015
Prepayment rate:
Decline in fair value from a 50 basis point decrease in interest rates		$5		$5
Decline in fair value from a 100 basis point decrease in interest rates		$15		$11
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		$5		$6