SunTrust 2007 Annual Report Download - page 114

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SUNTRUST BANKS, INC.
Notes to Consolidated Financial Statements (Continued)
MSRs
In addition to interests held in securities, the Company may retain MSRs from the sale or securitization of residential
mortgage loans. A summary of the key economic assumptions used to measure total MSRs and the sensitivity of the
December 31, 2007 and 2006 fair values to immediate 10% and 20% adverse changes in those assumptions follows:
2007 2006
Prepayment rate (annual) 16.5% 16.8%
Weighted-average life (in years) 55
Discount rate 9.9% 10.3%
Weighted-average coupon 6.2 6.1
(Dollars in millions) 2007 2006
Fair value of retained MSRs $1,407.1 $1,110.7
Prepayment rate assumption (annual) 16.5% 16.8%
Decline in fair value of 10% adverse change $60.5 $44.5
Decline in fair value of 20% adverse change 115.4 84.8
Discount rate (annual) 9.9% 10.3%
Decline in fair value of 10% adverse change $45.8 $35.4
Decline in fair value of 20% adverse change 88.7 68.6
The above sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value
based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to
the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result
in changes in another, which might magnify or counteract the sensitivities.
Furthermore, prepayment risk subjects the MSRs to impairment risk. The Company does not specifically hedge the MSRs
portfolio for the potential impairment risk; however, it does employ a business strategy using the natural counter-cyclicality
of the servicing and production business and may employ other financial instruments, including economic hedges, to manage
the overall performance of the business. Contractually specified mortgage servicing fees and late fees earned for the twelve
months ended December 31, 2007 and 2006 were $337.7 million and $259.8 million, respectively. These amounts are
reported in mortgage servicing related income in the Consolidated Statements of Income. Since SunTrust does not discretely
hedge its MSRs portfolio, the Company actively manages the size of MSRs and evaluates the market value in relation to
holding MSRs.
The following is the activity of MSRs included in intangible assets in the Consolidated Balance Sheets as of December 31:
(Dollars in thousands) 2007 2006 2005
Balance at beginning of year $810,509 $657,604 $482,392
Amortization1(181,263) (195,627) (166,482)
Servicing rights originated 639,158 503,801 341,694
Sale/securitization of MSRs (218,979) (155,269) -
Balance at end of year $1,049,425 $810,509 $657,604
1Included $85.5 million, $72.3 million, and $89.6 million for the years ended December 31, 2007, 2006 and 2005, respectively, on loans that have been
paid-in-full and loans that have been foreclosed.
No valuation allowances were required at December 31, 2007, 2006, and 2005 for the Company’s MSRs. As of
December 31, 2007, 2006, and 2005, the total unpaid principal balance of mortgage loans serviced was $149.9 billion,
$130.0 billion and $105.6 billion, respectively. Included in these amounts were $114.6 billion, $91.5 billion and $68.9 billion
as of December 31, 2007, 2006, and 2005, respectively, of loans serviced for third parties.
102