Citibank 2014 Annual Report Download - page 255

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Mortgage Servicing Rights
In connection with the securitization of mortgage loans, the Company’s
U.S. consumer mortgage business generally retains the servicing rights,
which entitle the Company to a future stream of cash flows based on the
outstanding principal balances of the loans and the contractual servicing
fee. Failure to service the loans in accordance with contractual requirements
may lead to a termination of the servicing rights and the loss of future
servicing fees.
These transactions create an intangible asset referred to as mortgage
servicing rights (MSRs), which are recorded at fair value on Citi’s
Consolidated Balance Sheet. The fair value of Citi’s capitalized MSRs was
$1.8 billion and $2.7 billion at December 31, 2014 and 2013, respectively.
Of these amounts, approximately $1.7 billion and $2.1 billion, respectively,
were specific to Citicorp, with the remainder to Citi Holdings. The MSRs
correspond to principal loan balances of $224 billion and $286 billion as of
December 31, 2014 and 2013, respectively. The following table summarizes
the changes in capitalized MSRs for the years ended December 31, 2014
and 2013:
In millions of dollars 2014 2013
Balance, beginning of year $2,718 $1,942
Originations 217 634
Changes in fair value of MSRs due to changes
in inputs and assumptions (344) 640
Other changes (1) (429) (496)
Sale of MSRs (317) (2)
Balance, as of December 31 $1,845 $2,718
(1) Represents changes due to customer payments and passage of time.
The fair value of the MSRs is primarily affected by changes in
prepayments of mortgages that result from shifts in mortgage interest rates.
Specifically, higher interest rates tend to lead to declining prepayments,
which causes the fair value of the MSRs to increase. 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
and sale commitments of mortgage-backed securities and purchased
securities classified as Trading account assets.
The Company receives fees during the course of servicing previously
securitized mortgages. The amounts of these fees for the years ended
December 31, 2014, 2013 and 2012 were as follows:
In millions of dollars 2014 2013 2012
Servicing fees $638 $800 $ 990
Late fees 25 42 65
Ancillary fees 56 100 122
Total MSR fees $719 $942 $1,177
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 years ended December 31, 2014 and 2013, Citi transferred non-
agency (private-label) securities with an original par value of approximately
$1.2 billion and $955 million, respectively, 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, 2014, the fair value of Citi-retained interests in
private-label re-securitization transactions structured by Citi totaled
approximately $545 million (including $194 million related to
re-securitization transactions executed in 2014), which has been recorded
in Trading account assets. Of this amount, approximately $133 million
was related to senior beneficial interests and approximately $412 million
was related to subordinated beneficial interests. As of December 31, 2013,
the fair value of Citi-retained interests in private-label re-securitization
transactions structured by Citi totaled approximately $425 million (including
$131 million related to re-securitization transactions executed in 2013).
Of this amount, approximately $58 million was related to senior beneficial
interests, and approximately $367 million was related to subordinated
beneficial interests. The original par value of private-label re-securitization
transactions in which Citi holds a retained interest as of December 31, 2014
and 2013 was approximately $5.1 billion and $6.1 billion, respectively.
The Company also re-securitizes U.S. government-agency guaranteed
mortgage-backed (agency) securities. During the years ended
December 31, 2014 and 2013, Citi transferred agency securities with a fair
value of approximately $22.5 billion and $26.3 billion, respectively, to
re-securitization entities.
As of December 31, 2014, the fair value of Citi-retained interests in agency
re-securitization transactions structured by Citi totaled approximately
$1.8 billion (including $1.5 billion related to re-securitization transactions
executed in 2014) compared to $1.5 billion as of December 31, 2013
(including $1.2 billion related to re-securitization transactions executed in
2013), which is recorded in Trading account assets. The original fair value
of agency re-securitization transactions in which Citi holds a retained interest
as of December 31, 2014 and 2013 was approximately $73.0 billion and
$75.5 billion, respectively.
As of December 31, 2014 and 2013, the Company did not consolidate any
private-label or agency re-securitization entities.