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Assets Held for Sale and Associated Liabilities | 9 Months Ended
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Sep. 30, 2024
Discontinued Operations and Disposal Groups [Abstract] |
Assets Held for Sale and Associated Liabilities | Assets Held for Sale and Associated Liabilities At September 30, 2024 we have classified certain assets and liabilities related to the sale of the mortgage servicing rights and our third-party origination platform as held for sale. A summary of these items are shown below:
(in millions) |  |
|  | September 30, 2024
Mortgage servicing rights |  | $ | 1,105 |
Loans |  | 465 |
Other assets |  | 61 |
Assets held for sale |  | $ | 1,631 |
Other liabilities |  | $ | 471 |
Liabilities associated with assets held for sale |  | $ | 471 |
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. On October 31, 2024, the Company completed the sale of a significant portion of its mortgage servicing rights. See Note 20 - Subsequent Events. Changes in the fair value of residential first mortgage servicing rights ("MSRs") were as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(in millions) | 2024 |  | 2023 |  | 2024 |  | 2023
Balance at beginning of period | $ | 1,122 |  |  | $ | 1,031 |  |  | $ | 1,111 |  |  | $ | 1,033 |
Additions from loans sold with servicing retained | 58 |  |  | 67 |  |  | 158 |  |  | 148 |
Reductions from sales | — |  |  | — |  |  | (69) |  |  | (51) |
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes, and other (1) | (31) |  |  | (20) |  |  | (91) |  |  | (54) |
Changes in estimates of fair value due to interest rate risk (1) (2) | (44) |  |  | 57 |  |  | (4) |  |  | 59 |
Fair value of MSRs at end of period | $ | 1,105 |  |  | $ | 1,135 |  |  | $ | 1,105 |  |  | $ | 1,135 |
(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:
| September 30, 2024
|  | Fair Value
(dollars in millions) | Actual | 10% adverse change | 20% adverse change
Option adjusted spread | 5.0 | % | $ | (20) |  | $ | (38) |
Constant prepayment rate | 8.3 | % | (46) |  | (87) |
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 September 30, |  | Nine Months Ended September 30,
(in millions) | 2024 |  | 2023 |  | 2024 |  | 2023
Net return on mortgage servicing rights |  |  |  |  |  |  |
Servicing fees, ancillary income and late fees (1) | $ | 60 |  |  | $ | 59 |  |  | $ | 176 |  |  | $ | 169 |
Decrease in MSR fair value due to pay-offs, pay-downs, run-off, model changes and other | (31) |  |  | (20) |  |  | (91) |  |  | (54) |
Changes in fair value due to interest rate risk | (44) |  |  | 57 |  |  | (4) |  |  | 59 |
Gain on MSR derivatives (2) | 48 |  |  | (73) |  |  | (7) |  |  | (105) |
Net transaction costs | 1 |  |  | — |  |  | — |  |  | 1 |
Total return (loss) included in net return on mortgage servicing rights | $ | 34 |  |  | $ | 23 |  |  | $ | 74 |  |  | $ | 70 |
(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 September 30, |  | Nine Months Ended September 30,
(in millions) | 2024 |  | 2023 |  | 2024 |  | 2023
Loan administration income on mortgage loans subserviced |  |  |  |  |  |  |
Servicing fees, ancillary income and late fees (1) | $ | 34 |  |  | $ | 42 |  |  | $ | 104 |  |  | $ | 116 |
Charges on subserviced custodial balances (2) | (47) |  | (55) |  | (125) |  | (124)
Other servicing charges | — |  | (1) |  | 2 |  | (3)
Total income (loss) on mortgage loans subserviced, included in loan administration income | $ | (13) |  |  | $ | (14) |  |  | $ | (19) |  |  | $ | (11) |
(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. Loans held-for-investment and Other Liabilities The Company originated government guaranteed loans which were pooled and sold as Ginnie Mae MBS. Pursuant to Ginnie Mae servicing guidelines, the Company has the unilateral right to repurchase loans securitized in Ginnie Mae pools that are due, but unpaid, for three consecutive months. As a result, once the delinquency criteria have been met, and regardless of whether the repurchase option has been exercised, the Company accounts for the loans as if they had been repurchased. At December 31, 2023, the Company recognized the loans and corresponding liability as loans held for investment and other liabilities, respectively, in the Consolidated Statement of Condition. At September 30, 2024, the loans and corresponding liability were presented as assets held for sale and liabilities associates with assets held for sale, respectively, in the Consolidated Statement of Condition. On October 31, 2024, $465 million of the loans held for sale and the corresponding liability related to the repurchase option were sold. See Note 20 - Subsequent Events. Other Assets Other assets included in assets held for sale at September 30, 2024 are substantially all related to corporate and escrow advances, which are short-term receivables related to advances made by the Company in connection with the servicing of mortgage loans. At September 30, 2024, corporate and escrow advances classified as assets held for sale totaled $60 million. On October 31, 2024 we sold a significant portion of the corporate and escrow advances classified as assets held for sale. See Note 20 - Subsequent Events.

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- Definition The entire disclosure related to a disposal group. Includes, but is not limited to, a discontinued operation, disposal classified as held-for-sale or disposed of by means other than sale or disposal of an individually significant component. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 205 -SubTopic 20 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/205-20/tableOfContent Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 360 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/360/tableOfContent + Details
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