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PNC » Topics » Residential mortgage servicing rights

These excerpts taken from the PNC 10-Q filed May 11, 2009.

Residential mortgage servicing rights

Residential mortgage servicing rights (MSRs) are carried at fair value on a recurring basis. These residential MSRs do not trade in an active open market with readily observable prices. Although sales of servicing assets do occur, the precise terms and conditions typically would not be available. Accordingly, management determines the fair value of its residential MSRs using a discounted cash flow model incorporating assumptions about loan prepayment rates, discount rates, servicing costs, and other economic factors. Management compares its fair value estimates to third-party valuations on a quarterly basis to assess the reasonableness of the fair values calculated by its internal valuation models. Due to the nature of the valuation inputs, residential MSRs are classified as Level 3.

 

Residential Mortgage Servicing Rights (a)

 

In millions    2009  

Balance at January 1

    $ 1,008  

Additions:

     

From loans sold with servicing retained

      97  

Changes in fair value due to:

     

Time and payoffs (b)

      (73 )

Purchase accounting adjustments

      17  

Other (c)

      3  

Balance at March 31

    $ 1,052  

Unpaid principal balance of loans serviced for others at March 31

    $ 168,444  
(a) The balance at January 1, 2008 and March 31, 2008 was $4 million, and the unpaid principal balance of loans serviced for others at March 31, 2008 was $356 million.
(b) Represents decrease in mortgage servicing rights value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that paid down or paid off during the period.
(c) Represents mortgage servicing rights value changes resulting primarily from market-driven changes in interest rates.

We recognize mortgage servicing right assets on residential real estate loans when we retain the obligation to service these loans upon sale and the servicing fee is more than adequate compensation. Mortgage servicing rights are subject to declines in value principally from actual or expected prepayments of the underlying loans. We manage this risk by economically hedging the fair value of mortgage servicing rights with securities and derivative instruments which are expected to increase in value when the value of mortgage servicing rights declines.

 

The fair value of residential mortgage servicing rights is estimated by using third party software with internal valuation assumptions. The software calculates the present value of estimated future net servicing cash flows considering estimates on servicing revenue and costs, discount rates, prepayment speeds and future mortgage rates.

Revenue from mortgage and other loan servicing generated contractually specified servicing fees, net interest income from servicing portfolio deposit balances, and ancillary fees totaling $204 million for the first quarter of 2009 and $43 million for the first quarter of 2008. We also generate servicing revenue from fee-based activities provided to others.

Amortization expense on intangible assets for the first quarter of 2009 was $76 million and $54 million for the first quarter of 2008. Amortization expense on existing intangible assets for 2009 through 2014 is estimated to be as follows:

  •  

Remainder of 2009: $268 million,

  •  

2010: $302 million,

  •  

2011: $273 million,

  •  

2012: $260 million,

  •  

2013: $231 million, and

  •  

2014: $197 million.


 

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EXCERPTS ON THIS PAGE:

10-Q (2 sections)
May 11, 2009

RELATED TOPICS for PNC:

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