NOTE 5—Loan Servicing

The fair value of mortgage servicing rights is calculated using various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs and other factors. A significant change in prepayments of mortgages in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of mortgage servicing rights.

The tables below present an analysis of mortgage servicing rights under the fair value measurement method:


	Three Months Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
	(In millions)
Carrying value, beginning of period	$	199		$	282		$	182		$	267
Additions		14			19			28			35
Decrease in fair value:
Due to change in valuation inputs or assumptions		(26	)		(28	)		(17	)		(23	)
Other changes (1)		(8	)		(5	)		(14	)		(11	)

Carrying value, end of period	$	179		$	268		$	179		$	268

(1)	Represents economic amortization associated with borrower repayments.

Data and assumptions used in the fair value calculation, as well as the valuation’s sensitivity to rate fluctuations, related to mortgage servicing rights (excluding related derivative instruments) are as follows:


	June 30
	2012			2011
	(Dollars in millions)
Unpaid principal balance	$	26,066		$	26,421
Weighted-average prepayment speed (CPR; percentage)		18.4	%		13.6	%
Estimated impact on fair value of a 10% increase	$	(12	)	$	(15	)
Estimated impact on fair value of a 20% increase	$	(22	)	$	(29	)
Option-adjusted spread (basis points)		1,332			714
Estimated impact on fair value of a 10% increase	$	(6	)	$	(7	)
Estimated impact on fair value of a 20% increase	$	(12	)	$	(14	)
Weighted-average coupon interest rate		5.1	%		5.3	%
Weighted-average remaining maturity (months)		278			283
Weighted-average servicing fee (basis points)		28.5			28.6

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes 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, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. The derivative instruments utilized by Regions would serve to reduce the estimated impacts to fair value included in the table above.

The following table presents servicing related fees, which includes contractually specified servicing fees, late fees and other ancillary income resulting from the servicing of mortgage loans:


	Three Months Ended June 30				Six Months Ended June 30
	2012		2011		2012		2011
	(In millions)
Servicing related fees and other ancillary income	$	21	$	21	$	42	$	42

Loans are sold in the secondary market with standard representations and warranties regarding certain characteristics such as the quality of the loan, the absence of fraud, the eligibility of the loan for sale and the future servicing associated with the loan. Regions may be required to repurchase these loans at par, or make-whole or indemnify the purchasers for losses incurred when representations and warranties are breached.

Regions maintains a repurchase liability related to mortgage loans sold with representations and warranty provisions. This repurchase liability is reported as other liabilities on the consolidated balance sheets and reflects management’s estimate of losses based on historical repurchase and loss trends, as well as other factors that may result in anticipated losses different from historical loss trends. Adjustments to this reserve are recorded in other non-interest expense on the consolidated statements of income. The table below presents an analysis of Regions’ repurchase liability related to mortgage loans sold with representations and warranty provisions:


	Three Months Ended June 30						Six Months Ended June 30
	2012			2011			2012			2011
	(In millions)
Beginning balance	$	32		$	32		$	32		$	32
Additions/(reductions), net		14			5			23			13
Losses		(9	)		(5	)		(18	)		(13	)

Ending balance	$	37		$	32		$	37		$	32

During the second quarter of 2012 and 2011, settled repurchase claims were related to one of the following alleged breaches: 1) underwriting guideline violations; 2) misrepresentation of income, assets or employment; or 3) property valuation not supported. These claims stem primarily from the 2006—2008 vintages.