Bank of America 2014 Annual Report Download - page 259

Bank of America 2014 257
NOTE 23 Mortgage Servicing Rights
The Corporation accounts for consumer MSRs at fair value with
changes in fair value recorded in mortgage banking income in the
Consolidated Statement of Income. The Corporation manages the
risk in these MSRs with securities including MBS and U.S. Treasury
securities, as well as certain derivatives such as options and
interest rate swaps, which are not designated as accounting
hedges. The securities used to manage the risk in the MSRs are
classified in other assets with changes in the fair value of the
securities and the related interest income recorded in mortgage
banking income.
The table below presents activity for residential mortgage and
home equity MSRs for 2014 and 2013. Residential reverse
mortgage MSRs, which are carried at the lower of cost or fair value
and accounted for using the amortization method, totaled $10
million at December 31, 2013, and are not included in the tables
below.
Rollforward of Mortgage Servicing Rights
(Dollars in millions) 2014 2013
Balance, January 1 $ 5,042 $ 5,716
Additions 707 472
Sales (61) (2,044)
Amortization of expected cash flows (1) (927) (1,043)
Impact of changes in interest rates and other market
factors (2) (1,191) 1,524
Model and other cash flow assumption changes: (3)
Projected cash flows, including changes in costs
to service loans (163) (27)
Impact of changes in the Home Price Index (25) (398)
Impact of changes to the prepayment model 243 609
Other model changes (4) (95) 233
Balance, December 31 (5) $ 3,530 $ 5,042
Mortgage loans serviced for investors (in billions) $ 490 $ 550
(1) Represents the net change in fair value of the MSR asset due to the recognition of modeled
cash flows.
(2) These amounts reflect the changes in modeled MSR fair value primarily due to observed changes
in interest rates, volatility, spreads and the shape of the forward swap curve.
(3) These amounts reflect periodic adjustments to the valuation model to reflect changes in the
modeled relationship between inputs and their impact on projected cash flows as well as
changes in certain cash flow assumptions such as cost to service and ancillary income per
loan.
(4) These amounts include the impact of periodic recalibrations of the model to reflect changes in
the relationship between market interest rate spreads and projected cash flows. Also included
is a decrease of $127 million for 2014 due to changes in option-adjusted spread rate
assumptions.
(5) At December 31, 2014, includes $3.3 billion of U.S. and $259 million of non-U.S. consumer
MSR balances.
The Corporation primarily uses an option-adjusted spread
(OAS) valuation approach which factors in prepayment risk to
determine the fair value of MSRs. This approach consists of
projecting servicing cash flows under multiple interest rate
scenarios and discounting these cash flows using risk-adjusted
discount rates. In addition to updating the valuation model for
interest, discount and prepayment rates, periodic adjustments are
made to recalibrate the valuation model for factors used to project
cash flows. The changes to the factors capture the effect of
variances related to actual versus estimated servicing proceeds.
Significant economic assumptions in estimating the fair value
of MSRs at December 31, 2014 and 2013 are presented below.
The change in fair value as a result of changes in OAS rates is
included within “Model and other cash flow assumption changes”
in the Rollforward of Mortgage Servicing Rights table. The weighted-
average life is not an input in the valuation model but is a product
of both changes in market rates of interest and changes in model
and other cash flow assumptions. The weighted-average life
represents the average period of time that the MSRs’ cash flows
are expected to be received. Absent other changes, an increase
(decrease) to the weighted-average life would generally result in
an increase (decrease) in the fair value of the MSRs.
Significant Economic Assumptions
December 31
2014 2013
Fixed Adjustable Fixed Adjustable
Weighted-average OAS 4.52% 7.61% 3.97% 7.61%
Weighted-average life, in years 4.53 2.95 5.70 2.86
The table below presents the sensitivity of the weighted-
average lives and fair value of MSRs to changes in modeled
assumptions. These sensitivities are hypothetical and should be
used with caution. As the amounts indicate, changes in fair value
based on variations in assumptions generally cannot be
extrapolated because the relationship of the change in assumption
to the change in fair value may not be linear. Also, the effect of a
variation in a particular assumption on the fair value of MSRs that
continue to be held by the Corporation is calculated without
changing any other assumption. In reality, changes in one factor
may result in changes in another, which might magnify or counteract
the sensitivities. The below sensitivities do not reflect any hedge
strategies that may be undertaken to mitigate such risk.
Sensitivity Impacts
December 31, 2014
Change in
Weighted-average Lives
(Dollars in millions) Fixed Adjustable
Change in
Fair Value
Prepayment rates
Impact of 10% decrease 0.23 years 0.19 years $ 232
Impact of 20% decrease 0.50 0.40 494
Impact of 10% increase (0.21) (0.16) (208)
Impact of 20% increase (0.39) (0.31) (395)
OAS level
Impact of 100 bps decrease $ 158
Impact of 200 bps decrease 329
Impact of 100 bps increase (146)
Impact of 200 bps increase (281)