Mortgage Servicing Rights

6 Months Ended

Jun. 30, 2023

Transfers and Servicing [Abstract]

Mortgage Servicing Rights

Mortgage Servicing Rights

The Company has investments in MSRs that result from the sale of loans to the secondary market for which we retain the servicing. The Company accounts for MSRs at their fair value. A primary risk associated with MSRs is the potential reduction in fair value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or government intervention. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. The Company utilizes derivatives as economic hedges to offset changes in the fair value of the MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. There is also a risk of valuation decline due to higher than expected default rates, which we do not believe can be effectively managed using derivatives. For further information regarding the derivative instruments utilized to manage our MSR risks, see Note 14 - Derivative and Hedging Activities.

Changes in the fair value of residential first mortgage MSRs were as follows:

(in millions)	Three Months Ended June 30, 2023		Six Months Ended June 30, 2023
Balance at beginning of period	$	1,034	$	1,033
Additions from loans sold with servicing retained	43		81
Reductions from sales	(51)		(51)
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (1)	(16)		(34)
Changes in estimates of fair value due to interest rate risk (1) (2)	21		2
Fair value of MSRs at end of period	$	1,031	$	1,031

(1)Changes in fair value are included within net return on mortgage servicing rights on the Consolidated Statements of Income and Comprehensive Income.

(2)Represents estimated MSR value change resulting primarily from market-driven changes which we manage through the use of derivatives.

The following table summarizes the hypothetical effect on the fair value of servicing rights using adverse changes of 10 percent and 20 percent to the weighted average of certain significant assumptions used in valuing these assets:

	June 30, 2023
				Fair Value
(dollars in millions)	Actual			10% adverse change		20% adverse change
Option adjusted spread	5.6		%	$	1,011	$	993
Constant prepayment rate	8.2		%	997		966
Weighted average cost to service per loan	$	69		$	1,021	$	1,011

	December 31, 2022
				Fair Value
(dollars in millions)	Actual			10% adverse change		20% adverse change
Option adjusted spread	5.9		%	$	1,012	$	992
Constant prepayment rate	7.9		%	1,000		970
Weighted average cost to service per loan	$	68		$	1,023	$	1,013

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. To isolate the effect of the specified change, the fair value shock analysis is consistent with the identified adverse change, while holding all other assumptions constant. In practice, a change in one assumption generally impacts other assumptions, which may either magnify or counteract the effect of the change. For further information on the fair value of MSRs.

Contractual servicing and subservicing fees, including late fees and other ancillary income are presented below. Contractual servicing fees are included within net return on mortgage servicing rights on the Consolidated Statements of Income and Comprehensive Income. Contractual subservicing fees including late fees and other ancillary income are included within loan administration income on the Consolidated Statements of Income and Comprehensive Income. Subservicing fee income is recorded for fees earned on subserviced loans, net of third-party subservicing costs.

The following table summarizes income and fees associated with owned MSRs:

(in millions)	Three months ended June 30, 2023		Six months ended June 30, 2023
Net return on mortgage servicing rights
Servicing fees, ancillary income and late fees (1)	$	54	$	110
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes and other	(16)		(34)
Changes in fair value due to interest rate risk	21		2
Gain on MSR derivatives (2)	(35)		(32)
Net transaction costs	2		1
Total return (loss) included in net return on mortgage servicing rights	$	26	$	47

(1)Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis.

(2)Changes in the derivatives utilized as economic hedges to offset changes in fair value of the MSRs.

The following table summarizes income and fees associated with our mortgage loans subserviced for others:

(in millions)	Three months ended June 30, 2023		Six months ended June 30, 2023
Loan administration income on mortgage loans subserviced
Servicing fees, ancillary income and late fees (1)	$	38	$	74
Charges on subserviced custodial balances (2)	(40)		(69)
Other servicing charges	(1)		(2)
Total income on mortgage loans subserviced, included in loan administration	$	(3)	$	3

(1) Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis.

(2)Charges on subserviced custodial balances represent interest due to MSR owner.