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Mortgage Servicing Rights | 6 Months Ended
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Jun. 30, 2024
Transfers and Servicing [Abstract] |
Mortgage Servicing Rights | Mortgage Servicing Rights The Company has investments in mortgage servicing rights that result from the sale of loans to the secondary market for which we retain the servicing. The Company accounts for mortgage servicing rights at fair value. A primary risk associated with mortgage servicing rights is the potential reduction in fair value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or government intervention. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. The Company utilizes derivatives as economic hedges to offset changes in the fair value of the mortgage servicing rights resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments. There is also a risk of valuation decline due to higher than expected default rates, which we do not believe can be effectively managed using derivatives. For further information regarding the derivative instruments utilized to manage our mortgage servicing rights risk, see Note 14 - Derivative and Hedging Activities. Subsequent to June 30, 2024, the Company entered into an agreement to sell all of its mortgage servicing rights for an amount equal to their carrying amount at the date of the agreement. See Note 19 - Subsequent Events. Changes in the fair value of residential first mortgage servicing rights ("MSRs") were as follows:
| Three Months Ended, |  | Six Months Ended,
(in millions) | June 30, 2024 |  | June 30, 2023 |  | June 30, 2024 |  | June 30, 2023
Balance at beginning of period | $ | 1,092 |  |  | $ | 1,034 |  |  | $ | 1,111 |  |  | $ | 1,033 |
Additions from loans sold with servicing retained | 58 |  |  | 43 |  |  | 100 |  |  | 81 |
Reductions from sales | — |  |  | (51) |  |  | (69) |  |  | (51) |
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (1) | (34) |  |  | (16) |  |  | (60) |  |  | (34) |
Changes in estimates of fair value due to interest rate risk (1) (2) | 6 |  |  | 21 |  |  | 40 |  |  | 2 |
Fair value of MSRs at end of period | $ | 1,122 |  |  | $ | 1,031 |  |  | $ | 1,122 |  |  | $ | 1,031 |
(1)Changes in fair value are included within net return on mortgage servicing rights on the Consolidated Statements of Income and Comprehensive Income. (2)Represents estimated MSR value change resulting primarily from market-driven changes which we manage through the use of derivatives. The following table summarizes the hypothetical effect on fair value of servicing rights using adverse changes of 10 percent and 20 percent to the weighted average of certain significant assumptions used in valuing these assets:
| June 30, 2024
|  | Fair Value
(dollars in millions) | Actual | 10% adverse change | 20% adverse change
Option adjusted spread | 5.2 | % | $ | (20) |  | $ | (39) |
Constant prepayment rate | 7.9 | % | (40) |  | (77) |
Weighted average cost to service per loan | $ | 68 |  | $ | (11) |  | $ | (22) |
| December 31, 2023
|  | Fair Value
(dollars in millions) | Actual | 10% adverse change | 20% adverse change
Option adjusted spread | 5.4 | % | $ | (20) |  | $ | (39) |
Constant prepayment rate | 7.9 | % | (37) |  | (71) |
Weighted average cost to service per loan | $ | 69 |  | $ | (10) |  | $ | (21) |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. To isolate the effect of the specified change, the fair value shock analysis is consistent with the identified adverse change, while holding all other assumptions constant. In practice, a change in one assumption generally impacts other assumptions, which may either magnify or counteract the effect of the change. For further information on the fair value of mortgage servicing rights, see Note 16 - Fair Value Measures. Contractual servicing and subservicing fees, including late fees and other ancillary income are presented below. Contractual servicing fees are included within net return on mortgage servicing rights on the Consolidated Statements of Income and Comprehensive Income. Contractual subservicing fees including late fees and other ancillary income are included within loan administration income on the Consolidated Statements of Income and Comprehensive Income. Subservicing fee income is recorded for fees earned on subserviced loans, net of third-party subservicing costs. The following table summarizes income and fees associated with owned mortgage servicing rights:
| Three Months Ended, |  | Six Months Ended,
(in millions) | June 30, 2024 |  | June 30, 2023 |  | June 30, 2024 |  | June 30, 2023
Net return on mortgage servicing rights |  |  |  |  |  |  |
Servicing fees, ancillary income and late fees (1) | $ | 58 |  |  | $ | 54 |  |  | $ | 116 |  |  | $ | 110 |
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes and other | (34) |  |  | (16) |  |  | (60) |  |  | (34) |
Changes in fair value due to interest rate risk | 6 |  |  | 21 |  |  | 40 |  |  | 2 |
Gain on MSR derivatives (2) | (11) |  |  | (35) |  |  | (55) |  |  | (32) |
Net transaction costs | — |  |  | 2 |  |  | (1) |  |  | 1 |
Total return (loss) included in net return on mortgage servicing rights | $ | 19 |  |  | $ | 26 |  |  | $ | 40 |  |  | $ | 47 |
(1)Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis. (2)Changes in the derivatives utilized as economic hedges to offset changes in fair value of the mortgage servicing rights. The following table summarizes income and fees associated with our mortgage loans subserviced for others:
| Three Months Ended, |  | Six Months Ended,
(in millions) | June 30, 2024 |  | June 30, 2023 |  | June 30, 2024 |  | June 30, 2023
Loan administration income on mortgage loans subserviced |  |  |  |  |  |  |
Servicing fees, ancillary income and late fees (1) | $ | 33 |  |  | $ | 38 |  |  | $ | 70 |  |  | $ | 74 |
Charges on subserviced custodial balances (2) | (42) |  | (40) |  | (78) |  | (69)
Other servicing charges | 1 |  | (1) |  | 2 |  | (2)
Total income (loss) on mortgage loans subserviced, included in loan administration income | $ | (8) |  |  | $ | (3) |  |  | $ | (6) |  |  | $ | 3 |
(1)Servicing fees are recorded on an accrual basis. Ancillary income and late fees are recorded on a cash basis. (2)Charges on subserviced custodial balances represent interest due to MSR owner.

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- Definition The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 946 -SubTopic 210 -Name Accounting Standards Codification -Section S99 -Paragraph 1 -Subparagraph (SX 210.6-04(11)) -Publisher 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