Transfers and Servicing of Mortgage Loans

9 Months Ended

Sep. 30, 2016

Transfers and Servicing of Mortgage Loans

3. Transfers and Servicing of Mortgage Loans

Residential mortgage loans are sold through one of the following methods: (i) sales to or pursuant to programs sponsored by Fannie Mae, Freddie Mac and the Government National Mortgage Association (collectively, the “Agencies”) or (ii) sales to private investors. The Company may have continuing involvement in mortgage loans sold by retaining mortgage servicing rights ("MSRs") and/or recourse obligations, as discussed further in Note 9, 'Credit Risk'.

The total servicing portfolio consists of loans associated with capitalized mortgage servicing rights, loans held for sale, and the portfolio associated with loans subserviced for others. The total servicing portfolio was $227.9 billion and $226.3 billion, as of September 30, 2016 and December 31, 2015, respectively. MSRs recorded in the Condensed Consolidated Balance Sheets are related to the capitalized servicing portfolio and are created primarily through sales of originated loans on a servicing-retained basis or through the direct purchase of servicing from a third party.

The approval or consents of the Agencies may be required prior to the Company completing sales of MSRs. In addition, as of September 30, 2016, 27% of the capitalized MSRs were specifically restricted from sale without prior approval from private label clients or private investors. The Company has agreements to sell a portion of its newly-created MSRs to third parties and will have continuing involvement as a subservicer. As of September 30, 2016, the Company had commitments to sell MSRs related to $109 million of the unpaid principal balance of Mortgage loans held for sale and Interest rate lock commitments that are expected to result in closed loans and $329 million of the unpaid principal balance of loans, with a fair value of MSRs of $4 million, that were included in the capitalized servicing portfolio. In November 2016, the Company entered into a commitment to sell an additional population of its MSRs, as discussed further in Note 14, 'Subsequent Events'.

The activity in the loan servicing portfolio associated with capitalized mortgage servicing rights consisted of:



	Nine Months Ended September 30,
	2016			2015
	(In millions)
Balance, beginning of period	$	98,990		$	112,686
Additions	4,476			7,086
Payoffs and curtailments	(14,102		)	(14,854		)
Sales	(742		)	(3,080		)
Balance, end of period	$	88,622		$	101,838

The activity in capitalized MSRs consisted of:



	Nine Months Ended September 30,
	2016			2015
	(In millions)
Balance, beginning of period	$	880		$	1,005
Additions	45			80
Sales	(8		)	(35		)
Changes in fair value due to:
Realization of expected cash flows	(98		)	(132		)
Changes in market inputs or assumptions used in the valuation model	(174		)	9
Balance, end of period	$	645		$	927

The value of MSRs is driven by the net positive cash flows associated with servicing activities. These cash flows include contractually specified servicing fees, late fees and other ancillary servicing revenue and were recorded within Loan servicing income as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(In millions)
Servicing fees from capitalized portfolio	$	67	$	72	$	204	$	228
Late fees	3		4		11		11
Other ancillary servicing revenue	6		4		14		19

As of September 30, 2016 and December 31, 2015, the MSRs had a weighted-average life of 5.3 years and 6.4 years, respectively. See Note 11, 'Fair Value Measurements' for additional information regarding the valuation of MSRs.

The following table sets forth information regarding cash flows relating to loan sales in which the Company has continuing involvement:



	Nine Months Ended September 30,
	2016			2015
	(In millions)
Proceeds from new loan sales or securitizations	$	4,647		$	7,267
Servicing fees from capitalized portfolio ⁽¹⁾	204			228
Purchases of previously sold loans ⁽²⁾	(232		)	(124		)
Servicing advances ⁽³⁾	(1,217		)	(1,576		)
Repayment of servicing advances ⁽³⁾	1,241			1,527

____________________


⁽¹⁾	Excludes late fees and other ancillary servicing revenue.


⁽²⁾	Includes purchases of repurchase eligible loans and excludes indemnification payments to investors and insurers of the related mortgage loans.


⁽³⁾	Outstanding servicing advance receivables are presented in Servicing advances, net in the Condensed Consolidated Balance Sheets, except for advances related to loans in foreclosure or real estate owned, which are included in Other assets.

During the three and nine months ended September 30, 2016, pre-tax gains of $77 million and $185 million, respectively, related to the sale or securitization of residential mortgage loans were recognized in Gain on loans held for sale, net in the Condensed Consolidated Statements of Operations.

During the three and nine months ended September 30, 2015, pre-tax gains of $82 million and $231 million, respectively, related to the sale or securitization of residential mortgage loans were recognized in Gain on loans held for sale, net in the Condensed Consolidated Statements of Operations.

- Definition

The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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