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MORTGAGE BANKING AND OTHER | 9 Months Ended
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Sep. 30, 2021
Mortgage Banking [Abstract] |
MORTGAGE BANKING AND OTHER | NOTE 5 - MORTGAGE BANKING AND OTHER The Company sells residential mortgages to GSEs and other parties, who may issue securities backed by pools of such loans. The Company retains no beneficial interests in these sales, but may retain the servicing rights for the loans sold. The Company may exercise its option to repurchase eligible government guaranteed residential mortgages or may be 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. The following table summarizes activity related to residential mortgage loans sold with servicing rights retained:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in millions) | 2021 |  | 2020 |  | 2021 |  | 2020
Cash proceeds from residential mortgage loans sold with servicing retained | $9,024 |  |  | $9,504 |  |  | $28,601 |  |  | $23,668 |
Repurchased residential mortgages | 114 |  |  | — |  |  | 1,283 |  |  | — |
Gain on sales(1) | 96 |  |  | 273 |  |  | 321 |  |  | 699 |
Contractually specified servicing, late and other ancillary fees(1) | 63 |  |  | 56 |  |  | 181 |  |  | 169 |
(1) Reported in mortgage banking fees in the Consolidated Statements of Operations. The unpaid principal balance of residential mortgage loans related to our MSR was $87.4 billion and $81.2 billion at September 30, 2021 and December 31, 2020, respectively. The Company manages an active hedging strategy to manage the risk associated with changes in the value of the MSR portfolio, which includes the purchase of freestanding derivatives. The following table summarizes changes in MSRs recorded using the fair value method:
| As of and for the Three Months Ended September 30, |  | As of and for the Nine Months Ended September 30,
(in millions) | 2021 |  | 2020 |  | 2021 |  | 2020
Fair value as of beginning of the period | $902 |  |  | $568 |  |  | $658 |  |  | $642 |
Transfers upon election of fair value method(1) | — |  |  | — |  |  | — |  |  | 190 |
Fair value as of beginning of the period, adjusted | 902 |  |  | 568 |  |  | 658 |  |  | 832 |
Amounts capitalized | 109 |  |  | 85 |  |  | 318 |  |  | 238 |
Changes in unpaid principal balance during the period(2) | (54) |  |  | (55) |  |  | (159) |  |  | (141) |
Changes in fair value during the period(3) | 21 |  |  | 8 |  |  | 161 |  |  | (323) |
Fair value at end of the period | $978 |  |  | $606 |  |  | $978 |  |  | $606 |
(1) Effective January 1, 2020, the Company elected to account for all MSRs previously accounted for under the amortization method under the fair value method. (2) Represents changes in value of the MSRs 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. (3) Represents changes in value primarily driven by market conditions. These changes are recorded in mortgage banking fees in the Consolidated Statements of Operations. 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 key economic assumptions and the decline in fair value if the respective adverse change was realized. These sensitivities are hypothetical, with the effect of a variation in a particular assumption on the fair value of the MSRs 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 largely dependent upon movements in market interest rates.
| September 30, 2021 |  | December 31, 2020
| Actual | Decline in fair value due to |  | Actual | Decline in fair value due to
(dollars in millions) |
Fair value | $978 | 50 bps adverse change | 100 bps adverse change |  | $658 | 50 bps adverse change | 100 bps adverse change
Weighted average life (in years) | 6.0 |  | 4.2
Weighted average constant prepayment rate(1) | 11.3% | $125 | $275 |  | 17.3% | $122 | $202
Weighted average option adjusted spread | 582 bps | 20 | 39 |  | 595 bps | 12 | 24
(1) Estimated adverse change for the weighted average constant prepayment rate based on an adverse change in market interest rates. Other Serviced Loans From time to time, Citizens engages in other servicing relationships. The following table presents the unpaid principal balance of other serviced loans:
(in millions) | September 30, 2021 |  | December 31, 2020
Education | $809 |  |  | $974 |
Commercial(1) | 67 |  |  | 51 |
(1) Represents the government guaranteed portion of SBA loans sold to outside investors.

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