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MORTGAGE BANKING | 12 Months Ended
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Dec. 31, 2018
Mortgage Banking [Abstract] |
MORTGAGE BANKING | MORTGAGE BANKING In its mortgage banking business, Citizens sells residential mortgages to government-sponsored entities and other parties, who may issue securities backed by pools of such loans. Citizens retains no beneficial interests in these sales, but may retain the servicing rights for the loans sold. Citizens is obligated to subsequently repurchase a loan if the purchaser discovers a representation or warranty violation such as noncompliance with eligibility or servicing requirements, or customer fraud, that should have been identified in a loan file review. Mortgage loans held for sale are accounted for at fair value on an individual loan basis. Changes in the fair value, and realized gains and losses on the sales of mortgage loans, are reported in mortgage banking fees. The following table summarizes activity related to the Company’s residential mortgage loan sales and the Company's mortgage banking activity:
| Year Ended December 31,
(in millions) | 2018 |  |  | 2017 |  |  | 2016 |
Residential mortgage loan sold with servicing retained |  | $8,149 |  |  |  | $3,161 |  |  |  | $2,652 |
Gain on sales (1) | 89 |  |  | 35 |  |  | 69 |
Contractually specified servicing, late and other ancillary fees (1) | 118 |  |  | 53 |  |  | 51 |
(1) Reported in mortgage banking fees in the Consolidated Statements of Operations. The Company recognizes the right to service residential mortgage loans for others, or MSRs, as separate assets, which are presented in other assets on the Consolidated Balance Sheets, when purchased, or when servicing is contractually separated from the underlying mortgage loans by sale with servicing rights retained. MSRs are initially recorded at fair value. Subsequent to the initial recognition, MSRs are measured using either the fair value method or the amortization method. MSRs accounted for under the amortization method are subsequently accounted for at lower of cost or fair value, net of accumulated amortization, which is recorded in proportion to, and over the period of, net servicing income. Citizens maintains two separate classes of MSRs which at the time of initial capitalization, are differentiated by how the risk associated with valuation changes of the MSRs is managed. The FAMC portfolio, acquired on August 1, 2018, is accounted for under the fair value method while the Company’s MSR portfolio held before the FAMC acquisition is accounted for under the amortization method. Citizens implemented an active hedging strategy to manage the risk associated with changes in the value of the MSR portfolio accounted for under the fair value method, which includes the purchase of freestanding derivatives. Any change in fair value during the period for MSRs carried under the fair value method, as well as amortization and impairment of MSRs under the amortization method, is recorded in mortgage banking fees in the Consolidated Statements of Operations. The following tables summarize changes in MSRs recorded using the amortization method and the fair value method: Amortization Method
| As of and for the Year Ended December 31,
(in millions) | 2018 |  |  | 2017 |
MSRs: |  |  |
Balance as of beginning of period |  | $201 |  |  |  | $167 |
Amount capitalized | 36 |  |  | 37 |
Purchases | 16 |  |  | 28 |
Amortization | (32 | ) |  | (31 | )
Carrying amount before valuation allowance | 221 |  |  | 201 |
Valuation allowance for servicing assets: |  |  |
Balance as of beginning of period | 3 |  |  | 5 |
Valuation recoveries | (3 | ) |  | (2 | )
Balance at end of period | — |  |  | 3 |
Net carrying value of MSRs |  | $221 |  |  |  | $198 |
Fair Value Method
| As of and for the Year Ended December 31, 2018
(in millions)
MSRs: |
Fair value as of beginning of the period |  | $— |
Acquired MSRs | 590 |
Amounts capitalized | 73 |
Changes in unpaid principal balance during the period (1) | (32 | )
Changes in fair value during the period (2) | (31 | )
Fair value at end of the period |  | $600 |
(1) Represents changes in value due to i) passage of time including the impact from both regularly scheduled loan principal payments and partial paydowns, and ii) loans that paid off during the period. (2) Represents changes in value primarily due to market driven changes in interest rates and prepayment speeds. The fair value of MSRs is estimated by using the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, contractual servicing fee income, servicing costs, default rates, ancillary income, and other economic factors, which are determined based on current market interest rates. The valuation does not attempt to forecast or predict the future direction of interest rates. The sensitivity analysis below presents the impact to current fair value of an immediate 50 basis point and 100 basis point adverse change in the key economic assumptions and presents the decline in fair value that would occur if the adverse change were realized. These sensitivities are hypothetical, with the effect of a variation in a particular assumption on the fair value of the mortgage servicing rights calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., changes in interest rates, which drive changes in prepayment rates, could result in changes in the discount rates), which may amplify or counteract the sensitivities. The primary risk inherent in the Company’s MSRs is an increase in prepayments of the underlying mortgage loans serviced, which is dependent upon movements in market interest rates. For MSRs under the amortization method, the key economic assumptions used to estimate the fair value are presented below:
| December 31, 2018 |  | December 31, 2017
| Actual | Decline in fair value due to |  | Actual | Decline in fair value due to
(dollars in millions) |
Fair value | $243 | 50 bps adverse change | 100 bps adverse change |  | $218 | 50 bps adverse change | 100 bps adverse change
Weighted average life (in years) | 6.5 |  | 5.9
Weighted average constant prepayment rate | 8.5% | $24 | $56 |  | 10.0% | $22 | $46
Weighted average discount rate | 9.3% | 5 | 9 |  | 9.9% | 4 | 8
For MSRs under the fair value method, the key economic assumptions used to estimate the fair value are presented below:
| December 31, 2018
| Actual | Decline in fair value due to
(dollars in millions)
Fair value | $600 | 50 bps adverse change | 100 bps adverse change
Weighted average life (in years) | 8.0
Weighted average constant prepayment rate | 8.2% | $68 | $148
Weighted average option adjusted spread | 609 bps | 13 | 26
Citizens accounts for derivatives in its mortgage banking operations at fair value on the balance sheet as derivative assets or derivative liabilities, depending on whether the derivative had a positive (asset) or negative (liability) fair value as of the balance sheet date. The Company’s mortgage banking derivatives include commitments to originate mortgages held for sale, certain loan sale agreements, and other financial instruments that meet the definition of a derivative. Refer to Note 13 “Derivatives” for additional information.

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