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.

Mortgage loans held for sale are accounted for at fair value on an individual loan basis. Changes in the fair value, and realized gains and losses on the sales of mortgage loans, are reported in mortgage banking fees.

Information related to residential mortgage loan sales and the Company's mortgage banking activity is presented below:



	Year Ended December 31,
(in millions)	2017			2016			2015
Residential mortgage loan sale proceeds⁽¹⁾		$3,161			$2,652			$2,667
Gain on sales	35			69			51
Mortgage servicing fees	53			51			55
Repurchased residential mortgages	3			6			10
Valuation recoveries	(2		)	(4		)	(9		)

⁽¹⁾Represents the unpaid principal balance at the time of the sale.

The Company recognizes the right to service mortgage loans for others, or MSRs, as assets whether the Company purchases the MSRs or the MSRs result from a sale. MSRs are initially recognized at fair value, and subsequently accounted for in the Consolidated Balance Sheets at the lower of cost or fair value, net of accumulated amortization, which is recorded in proportion to, and over the period of, net servicing income. The Company’s identification of MSRs in a single class is determined based on the availability of market inputs and the Company’s method of managing MSR risks. For the purpose of impairment evaluation and measurement, MSRs are stratified based on predominant risk characteristics (such as interest rate, loan size, origination date, term, or geographic location) of the underlying loans. An allowance is then established in the event the recorded value of an individual stratum exceeds fair value.

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



	As of and for the Year Ended December 31,
(in millions)	2017			2016
MSRs:
Balance as of beginning of period		$167			$173
Amount capitalized	37			29
Purchases	28			—
Amortization	(31		)	(35		)
Carrying amount before valuation allowance	201			167
Valuation allowance for servicing assets:
Balance as of beginning of period	5			9
Valuation recoveries	(2		)	(4		)
Balance at end of period	3			5
Net carrying value of MSRs		$198			$162

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,
	2017			2016
(dollars in millions)	Weighted-Average	Range		Weighted-Average	Range
Fair value	$218	Min	Max	$182	Min	Max
Weighted-average life (in years)	5.9	2.3	8.4	5.7	2.6	7.3
Weighted-average constant prepayment rate	10.0%	6.6%	20.1%	10.8%	8.8%	22.3%
Weighted-average discount rate	9.9%	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:



	Year Ended December 31,
	2017	2016	2015
Weighted-average life (in years)	7.3	6.1	5.9
Weighted-average constant prepayment rate	8.7%	11.0%	10.7%
Weighted-average discount rate	9.8%	9.7%	9.7%

The sensitivity analysis below presents the impact to current fair value of an immediate 50 basis point and 100 basis point 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.



	December 31,
(in millions)	2017		2016
Prepayment rate:
Decline in fair value from a 50 basis point decrease in interest rates		$22		$9
Decline in fair value from a 100 basis point decrease in interest rates	46		25
Weighted-average discount rate:
Decline in fair value from a 50 basis point increase in weighted-average discount rate	4		3
Decline in fair value from a 100 basis point increase in weighted-average discount rate	8		6

The Company accounts for derivatives in its mortgage banking operations at fair value on the balance sheet as derivative assets or derivative liabilities, depending on whether the derivative had a positive (asset) or negative (liability) fair value as of the balance sheet date. The Company’s mortgage banking derivatives include commitments to originate mortgages held for sale, certain loan sale agreements, and other financial instruments that meet the definition of a derivative.