Citibank 2011 Annual Report Download - page 247

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The market for MSRs is not sufficiently liquid to provide participants
with quoted market prices. Therefore, the Company uses an option-adjusted
spread valuation approach to determine the fair value of MSRs. This
approach consists of projecting servicing cash flows under multiple interest
rate scenarios and discounting these cash flows using risk-adjusted discount
rates. The key assumptions used in the valuation of MSRs include mortgage
prepayment speeds and discount rates. The model assumptions and the
MSRs’ fair value estimates are compared to observable trades of similar MSR
portfolios and interest-only security portfolios, as available, as well as to MSR
broker valuations and industry surveys. The cash flow model and underlying
prepayment and interest rate models used to value these MSRs are subject to
validation in accordance with the Company’s model validation policies.
The fair value of the MSRs is primarily affected by changes in
prepayments that result from shifts in mortgage interest rates. In managing
this risk, the Company economically hedges a significant portion of the
value of its MSRs through the use of interest rate derivative contracts, forward
purchase commitments of mortgage-backed securities and purchased
securities classified as trading.
The Company receives fees during the course of servicing previously
securitized mortgages. The amounts of these fees for the years ended
December 31, 2011, 2010 and 2009 were as follows:
In millions of dollars 2011  
3ERVICINGæFEES $1,170  
,ATEæFEES 76  
!NCILLARYæFEES 130  
Total MSR fees $1,376  
These fees are classified in the Consolidated Statement of Income as
Other revenue.
Re-securitizations
The Company engages in re-securitization transactions in which debt
securities are transferred to a VIE in exchange for new beneficial interests.
During the 12 months ended December 31, 2011, Citi transferred non-agency
(private label) securities with an original par value of approximately
$303 million to re-securitization entities. These securities are backed by
either residential or commercial mortgages and are often structured on
behalf of clients. As of December 31, 2011, the fair value of Citi-retained
interests in private-label re-securitization transactions structured by Citi
totaled approximately $340 million ($39 million of which relates to
re-securitization transactions executed in 2011) and are recorded in trading
assets. Of this amount, approximately $17 million and $323 million related
to senior and subordinated beneficial interests, respectively. The original
par value of private label re-securitization transactions in which Citi holds a
retained interest as of December 31, 2011 was approximately $7.2 billion.
The Company also re-securitizes U.S. government-agency guaranteed
mortgage-backed (agency) securities. During the 12 months ended
December 31, 2011, Citi transferred agency securities with a fair
value of approximately $37.7 billion to re-securitization entities. As of
December 31, 2011, the fair value of Citi-retained interests in agency
re-securitization transactions structured by Citi totaled approximately
$2.3 billion ($2.1 billion of which related to re-securitization transactions
executed in 2011) and are recorded in trading assets. The original fair value
of agency re-securitization transactions in which Citi holds a retained interest
as of December 31, 2011 was approximately $50.6 billion.
As of December 31, 2011, the Company did not consolidate any
private-label or agency re-securitization entities.