Bank of America 2007 Annual Report Download - page 170

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Note 21 – Mortgage Servicing Rights
The Corporation accounts for residential first mortgage MSRs at fair value
with changes in fair value recorded in the Consolidated Statement of
Income in mortgage banking income. The Corporation economically hedges
these MSRs with certain derivatives such as options and interest rate
swaps.
The following table presents activity for residential first mortgage
MSRs for 2007 and 2006.
(Dollars in millions) 2007 2006
Balance, January 1
$2,869
$2,658
MBNA balance, January 1, 2006
–
9
Additions
792
572
Sales of MSRs
–
(71)
Impact of customer payments
(766)
(713)
Other changes in MSR market value
158
414
Balance, December 31
$3,053
$2,869
In 2007, other changes in MSR market value of $158 million reflect
the change in discount rates and prepayment speed assumptions, mostly
due to changes in interest rates. The amount does not include $73 million
resulting from the actual cash received exceeding expected prepayments.
The total amount of $231 million is included in the line “mortgage banking
income (loss)” in the table “Total Gains and Losses” in Note 19 – Fair
Value Disclosures to the Consolidated Financial Statements.
The key economic assumptions used in valuations of MSRs include
modeled prepayment rates and resultant weighted average lives of the
MSRs and the OAS levels. Commercial and residential reverse mortgage
MSRs are accounted for using the amortization method (i.e., lower of cost
or market). Commercial and residential reverse mortgage MSRs totaled
$294 million at December 31, 2007, and commercial MSRs totaled $176
million at December 31, 2006 and are not included in the preceding table.
As of December 31, 2007, the fair value of residential first mortgage
MSRs was $3.1 billion, and the modeled weighted average lives of MSRs
related to fixed and adjustable rate loans (including hybrid adjustable rate
mortgages) were 4.80 years and 2.75 years. The table below presents the
sensitivity of the weighted average lives and fair value of MSRs to changes
in modeled assumptions.
December 31, 2007
Change in Weighted Average Lives
(Dollars in millions) Fixed Adjustable
Change
in Fair
Value
Prepayment rates
Impact of 10% decrease 0.33 years 0.25 years $ 169
Impact of 20% decrease 0.72 0.56 362
Impact of 10% increase (0.29) (0.21) (149)
Impact of 20% increase (0.55) (0.39) (280)
OAS level
Impact of 100 bps decrease n/a n/a $ 128
Impact of 200 bps decrease n/a n/a 267
Impact of 100 bps increase n/a n/a (118)
Impact of 200 bps increase
n/a
n/a (226)
n/a = not applicable
168
Bank of America 2007