Bank of America 2015 Annual Report Download - page 244

242 Bank of America 2015
NOTE 23 Mortgage Servicing Rights
The Corporation accounts for consumer MSRs at fair value with
changes in fair value primarily recorded in mortgage banking
income in the Consolidated Statement of Income. The Corporation
manages the risk in these MSRs with derivatives such as options
and interest rate swaps, which are not designated as accounting
hedges, as well as securities including MBS and U.S. Treasury
securities. 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 2015 and 2014.
Rollforward of Mortgage Servicing Rights
(Dollars in millions) 2015 2014
Balance, January 1 $ 3,530 $ 5,042
Additions 637 707
Sales (393) (61)
Amortization of expected cash flows (1) (874) (927)
Impact of changes in interest rates and other market
factors (2) 41 (1,191)
Model and other cash flow assumption changes: (3)
Projected cash flows, including changes in costs
to service loans 100 (163)
Impact of changes in the Home Price Index (13) (25)
Impact of changes to the prepayment model (10) 243
Other model changes (4) 69 (95)
Balance, December 31 (5) $ 3,087 $ 3,530
Mortgage loans serviced for investors (in billions) $ 394 $ 490
(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 and periodic
adjustments to valuation based on third-party discovery.
(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, 2015, includes $2.7 billion of U.S. and $407 million of non-U.S. consumer
MSR balances compared to $3.3 billion and $259 million at December 31, 2014.
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, 2015 and 2014 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
2015 2014
Fixed Adjustable Fixed Adjustable
Weighted-average OAS 4.62% 7.61% 4.52% 7.61%
Weighted-average life, in years 4.46 3.43 4.53 2.95
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, 2015
Change in
Weighted-average Lives
(Dollars in millions) Fixed Adjustable
Change in
Fair Value
Prepayment rates
Impact of 10% decrease 0.30 years 0.26 years $ 183
Impact of 20% decrease 0.64 0.55 389
Impact of 10% increase (0.26) (0.23) (163)
Impact of 20% increase (0.50) (0.43) (310)
OAS level
Impact of 100 bps decrease $ 124
Impact of 200 bps decrease 259
Impact of 100 bps increase (115)
Impact of 200 bps increase (221)