Fifth Third Bank 2012 Annual Report Download - page 116

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
114 Fifth Third Bancorp
A
s of December 31, 2012 and 2011, the key economic assumptions used in measuring the MSRs that continued to be held by the Bancorp at the
date of sale or securitization resulting from transactions completed during the years ended December 31 were as follows:
2012 2011
Rate
Weighted-
A
verage Life
(in years)
Prepayment
Speed (annual)
Discount Rate
(annual)
Weighted-
Average
Default rate
Weighted-
A
verage Life
(in years)
Prepayment
Speed (annual)
Discount Rate
(annual)
Weighted-
Average
Default rate
Residential mortgage loans:
Servicing assets Fixed 6.9 9.6 % 10.4 % N/
A
7.2 8.8 % 10.5 % N/A
Servicing assets Adjustable 3.8 22.0 11.4 N/
A
3.7 22.8 11.4 N/A
Based on historical credit experience, expected credit losses for
residential mortgage loan servicing assets have been deemed
immaterial, as the Bancorp sold the majority of the underlying loans
without recourse. At December 31, 2012 and 2011, the Bancorp
serviced $62.5 billion and $57.1 billion, respectively, of residential
mortgage loans for other investors. The value of MSRs that
continue to be held by the Bancorp is subject to credit, prepayment
and interest rate risks on the sold financial assets.
A
t December 31, 2012, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in
prepayment speed assumptions and immediate 10% and 20% adverse changes in other assumptions are as follows:
Prepayment Residual Servicing
Speed Assumption Cash Flows
Fair
Weighted-
Average
Life (in
Impact of Adverse Change
on Fair Value Discount
Impact of Adverse
Change on Fair
Value
($ in millions)(a) Rate Value years) Rate 10% 20% 50% Rate 10% 20%
Residential mortgage loans:
Servicing assets Fixed $664 4.8 16.1 % $ (37) (72) (159) 10.5 % $ (22) (42)
Servicing assets Adjustable 33 3.1 26.9 (2) (3) (6) 11.7 (1) (2)
(a) The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial.
These sensitivities are hypothetical and should be used with caution.
As the figures indicate, changes in fair value based on these
variations in the assumptions typically cannot be extrapolated
because the relationship of the change in assumption to the change
in fair value may not be linear. The Bancorp believes variations of
these levels are reasonably possible; however there is the potential
that adverse changes in key assumptions could be even greater.
Also, in the previous table, the effect of a variation in a particular
assumption on the fair value of the interests that continue to be held
by the Bancorp is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in
another (for example, increases in market interest rates may result in
lower prepayments), which might magnify or counteract these
sensitivities.