Notes to Consolidated Financial Statements
  

Note K — Securitizations

The Company routinely originates, securitizes and sells mortgage loans into the secondary market. As a result of this process, the Company typically retains the MSRs and may retain interest-only strips, principal-only strips and one or more subordinated interests. In general, conventional securitizations are structured without recourse to the Company. Government loans serviced by the Company are insured by the Federal Housing Administration or partially guaranteed against loss by the Department of Veterans Affairs. The Company is exposed to credit losses to the extent that the partial guarantee provided by the Department of Veterans Affairs is inadequate to cover the total credit losses incurred. The Company retains primary credit risk on the home equity and sub-prime loans it securitizes through retention of a subordinated interest or through a corporate guarantee of losses up to a negotiated maximum amount. In general, there are no restrictions on the Company's retained interests. The Company recognized gains of $444.8 million from sales of financial assets in securitizations in the year ended February 28, 2001.

  Key economic assumptions used in determining the fair value of MSRs and other retained interests at the time of securitization were as follows.

Year ended February 28, 2001 
 
MSRs
Other
Retained
Interests
Weighted-average life (in years) 
8.2 
4.1 
Weighted-average prepayment speed (annual rate) 
11.0% 
24.3% 
Weighted-average discount rate (annual rate) 
10.3% 
15.4% 
Weighted-average anticipated credit losses 
0.01% 
2.5% 

  The following table summarizes cash flows between the Company and securitization special purpose entities.
   
(Dollar amounts in thousands) 
Year ended February 28, 2001 
Proceeds from new securitizations 
$ 
60,494,596 
Proceeds from collections reinvested in securitizations 
$ 
707,460 
Service fees received 
$ 
821,836 
Purchases of delinquent loans 
$ 
(2,610,563)
Servicing advances 
$ 
(468,602)
Repayment of servicing advances 
$ 
405,097 
Other cash flows received on retained interest(a) 
$ 
295,698 
   

(a) Represents cash flows received on retained interests other than servicing fees.

  Key economic assumptions used in subsequently measuring the fair value of the Company's retained interests at February 28, 2001 and the effect on the fair value of those retained interests from adverse changes in those assumptions are as follows:

 
Year ended February 28, 2001 
(Dollar amounts in thousands) 
MSRS 
Other Retained Interest 
Fair value of retained interests 
$ 
5,834,058 
$ 
1,202,093 
Weighted-average life (in years) 
6.1 
4.4 
Weighted-average Prepayment speed (annual rate) 
16.1% 
23.3% 
Impact of 10% adverse change 
$ 
263,080 
$ 
62,058 
Impact of 20% adverse change 
$ 
500,464 
$ 
113,446 
Weighted-average Discount rate (annual rate) 
9.8% 
16.6% 
Impact of 10% adverse change 
$ 
209,159 
$ 
30,728 
Impact of 20% adverse change 
$ 
404,732 
$ 
59,179 
Weighted -average Lifetime Credit Losses 
0.02% 
3.3% 
Impact of 10% adverse change 
$ 
3,082 
$ 
18,223 
Impact of 20% of adverse change 
$ 
6,163 
$ 
35,423 

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in discount rates), which might magnify or counteract the sensitivities.

The following table presents information about delinquencies and components of securitized and other managed assets.

 
Year ended February 28, 2001 
(Dollar amounts in thousands) 
Total
Principal Amount
Principal
Amount 60 Days
or More Past Due
Sub-prime and Home Equity loans 
$ 
11,695,059 
$ 441,129 
    
Comprised of: 
  Assets securitized 
$ 
11,510,760 
  Assets held for sale 
184,299 
 
$ 
11,695.059 

  The Company incurred credit losses of $43.6 million related to the assets above during the year ended February 28, 2001.