![Consolidated Financial Statements and Notes](images/consolidated_headers.gif)
Note 9 Securitizations
The Corporation securitizes assets and may continue to hold a portion or all of the securities, subordinated tranches, interest-only strips, subordinated interests in accrued interest and fees on the securitized receivables, and, in some cases, cash reserve accounts, all of which are known as retained interests, which are carried at fair value or amounts that approximate fair value. Those assets may be serviced by the Corporation or by third parties.
Mortgage-related Securitizations
The Corporation securitizes a portion of its residential mortgage loan originations in conjunction with or shortly after loan closing. In addition, the Corporation may, from time to time, securitize commercial mortgages and first residential mortgages that it originates or purchases from other entities. In 2006 and 2005, the Corporation converted a total of $65.5 billion (including $15.5 billion originated by other entities) and $95.1 billion (including $15.9 billion originated by other entities), of commercial mortgages and first residential mortgages into mortgage-backed securities issued through Fannie Mae, Freddie Mac, Government National Mortgage Association, Bank of America, N.A. and Banc of America Mortgage Securities. At December 31, 2006 and 2005, the Corporation retained $5.5 billion (including $4.2 billion issued prior to 2006) and $7.2 billion (including $2.4 billion issued prior to 2005) of these securities. At December 31, 2006, these retained interests were valued using quoted market prices.
In 2006, the Corporation reported $341 million in gains on loans converted into securities and sold, of which gains of $329 million were from loans originated by the Corporation and $12 million were from loans originated by other entities. In 2005, the Corporation reported $575 million in gains on loans converted into securities and sold, of which gains of $592 million were from loans originated by the Corporation and losses of $17 million were from loans originated by other entities. At December 31, 2006 and 2005, the Corporation had recourse obligations of $412 million and $471 million with varying terms up to seven years on loans that had been securitized and sold.
In 2006 and 2005, the Corporation purchased $17.4 billion and $19.6 billion of mortgage-backed securities from third parties and resecuritized them. Net gains, which include Net Interest Income earned during the holding period, totaled $25 million and $13 million. The Corporation did not retain any of the securities issued in these transactions.
In 2006 and 2005, the Corporation also purchased an additional $4.9 billion and $7.2 billion of mortgage loans from third parties and securitized them. In 2006, the Corporation retained residual interests in these transactions which totaled $224 million at December 31, 2006 and are classified in Trading Account Assets, with changes in fair value recorded in earnings. These residual interests are included in the sensitivity table below which sets forth the sensitivity of the fair value of residual interests to changes in key assumptions. In 2005, the Corporation resecuritized the residual interests and did not retain a significant interest in the securitization trusts. The Corporation reported $16 million and $4 million in gains on these transactions in 2006 and 2005.
The Corporation has retained MSRs from the sale or securitization of mortgage loans. Servicing fee and ancillary fee income on all mortgage loans serviced, including securitizations, was $775 million and $789 million in 2006 and 2005. For more information on MSRs, see Note 8 of the Consolidated Financial Statements.
Credit Card and Other Securitizations
As a result of the MBNA merger, the Corporation acquired interests in credit card, other consumer, and commercial loan securitization vehicles. These acquired interests include interest-only strips, subordinated tranches, cash reserve accounts, and subordinated interests in accrued interest and fees on the securitized receivables. During 2006, the Corporation securitized $23.7 billion of credit card receivables resulting in $104 million in gains (net of securitization transaction costs of $28 million) which was recorded in Card Income. Aggregate debt securities outstanding for the MBNA credit card securitization trusts as of December 31, 2006 and January 1, 2006, were $96.0 billion and $81.6 billion. As of December 31, 2006 and January 1, 2006, the aggregate debt securities outstanding for the Corporation's credit card securitization trusts, including MBNA, were $96.8 billion and $83.8 billion. The other consumer and commercial loan securitization vehicles acquired with MBNA were not material to the Corporation.
The Corporation also securitized $3.3 billion and $3.8 billion of automobile loans and recorded losses of $6 million and $17 million in 2006 and 2005. At December 31, 2006 and 2005, aggregate debt securities outstanding for the Corporation's automobile securitization vehicles were $5.2 billion and $4.0 billion, and the Corporation held residual interests which totaled $130 million and $93 million.
At December 31, 2006 and 2005, the Corporation held investment grade securities issued by its securitization vehicles of $3.5 billion (none of which were issued in 2006) and $4.4 billion (including $2.6 billion issued in 2005), which are valued using quoted market prices, in the AFS securities portfolio. At December 31, 2006 and 2005, there were no recognized servicing assets or liabilities associated with any of these securitization transactions.
The Corporation has provided protection on a subset of one consumer finance securitization in the form of a guarantee with a maximum payment of $220 million that will only be paid if over-collateralization is not sufficient to absorb losses and certain other conditions are met. The Corporation projects no payments will be due over the remaining life of the contract, which is less than one year.
Key economic assumptions used in measuring the fair value of certain residual interests that continue to be held by the Corporation (included in Other Assets) in securitizations and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are disclosed in the following table.
Credit Card | Consumer Finance (1) | |||
---|---|---|---|---|
(Dollars in millions) | 2006 | 2005 | 2006 | 2005 |
Carrying amount of residual interests (2) |
$ |
$ |
$ |
$ |
Balance of unamortized securitized loans | 98,295 | 2,237 | 6,153 | 2,667 |
Weighted average life to call or maturity (in years) | 0.3 | 0.5 | 0.3-2.7 | 0.8 |
Revolving structuresmonthly payment rate |
11.2-19.8 % |
12.1 % |
||
Amortizing structuresannual constant
prepayment rate: |
||||
Fixed rate loans
|
20.0-25.9 % |
26.3-28.9 % |
||
Adjustable rate loans
|
32.8-37.1 | 37.6 | ||
Impact on fair value of 10% favorable
change |
$ |
$ |
$ |
$ |
Impact on fair value of 25% favorable
change |
133 | 3 | 12 | 17 |
Impact on fair value of 10% adverse
change |
(38) | (2) | (15) | (16) |
Impact on fair value of 25% adverse
change |
(82) | (3) | (23) | (39) |
Expected credit losses (3)
|
3.8-5.8 % |
4.0-4.3 % |
4.4-5.9 % |
3.9-5.6 % |
Impact on fair value of 10% favorable
change |
$ |
$ |
$ |
$ |
Impact on fair value of 25% favorable
change |
218 | 8 | 42 | 18 |
Impact on fair value of 10% adverse
change |
(85) | (3) | (15) | (7) |
Impact on fair value of 25% adverse
change |
(211) | (8) | (36) | (18) |
Residual cash flows discount rate (annual rate)
|
12.5 % |
12.0 % |
16.0-30.0 % |
30.0 % |
Impact on fair value of 100 bps favorable
change |
$ |
$ |
$ |
$ |
Impact on fair value of 200 bps favorable
change |
17 | | 11 | 11 |
Impact on fair value of 100 bps adverse
change |
(14) | | (5) | (5) |
Impact on fair value of 200 bps adverse
change |
(27) | | (10) | (10) |
The sensitivities in the preceding table 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, the effect of a variation in a particular assumption on the fair value of an interest that continues to be held by the Corporation 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. Additionally, the Corporation has the ability to hedge interest rate risk associated with retained residual positions. The above sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk.
Static pool net credit losses are considered in determining the value of the retained interests of the consumer finance securitization. Static pool net credit losses include actual losses incurred plus projected credit losses divided by the original balance of each securitization pool. For consumer finance securitizations entered into in 2006, weighted average static pool net credit losses were 5.00 percent for the year ended December 31, 2006. For consumer finance securitizations entered into in 2001, weighted average static pool net credit losses were 5.29 percent for the year ended December 31, 2006, and 5.50 percent for the year ended December 31, 2005.
Principal proceeds from collections reinvested in revolving credit card securitizations were $163.4 billion and $4.5 billion in 2006 and 2005. Contractual credit card servicing fee income totaled $1.9 billion and $97 million in 2006 and 2005. Other cash flows received on retained interests, such as cash flow from interest-only strips, were $6.7 billion and $183 million in 2006 and 2005, for credit card securitizations. Proceeds from collections reinvested in revolving commercial loan securitizations were $4.6 billion and $8.7 billion in 2006 and 2005. Servicing fees and other cash flows received on retained interests, such as cash flows from interest-only strips, were $2 million and $15 million in 2006, and $3 million and $34 million in 2005 for commercial loan securitizations.
The Corporation also reviews its loans and leases portfolio on a managed basis. Managed loans and leases are defined as on-balance sheet Loans and Leases as well as those loans in revolving securitizations and other securitizations where servicing is retained that are undertaken for corporate management purposes, which include credit card, commercial loans, automobile and certain mortgage securitizations. Managed loans and leases exclude originate-to-distribute loans and other loans in securitizations where the Corporation has not retained servicing. New advances on accounts for which previous loan balances were sold to the securitization trusts will be recorded on the Corporation's Consolidated Balance Sheet after the revolving period of the securitization, which has the effect of increasing Loans and Leases on the Corporation's Consolidated Balance Sheet and increasing Net Interest Income and charge-offs, with a related reduction in Noninterest Income.
Portfolio balances, delinquency and historical loss amounts of the managed loans and leases portfolio for 2006 and 2005 were as follows:
December 31, 2006 | December 31, 2005 (1) | |||||
---|---|---|---|---|---|---|
(Dollars in millions) | Total Loans and Leases |
Accruing Loans and Leases Past Due 90 Days or More |
Nonperforming Loans and Leases |
Total Loans and Leases |
Accruing Loans and Leases Past Due 90 Days or More |
Nonperforming Loans and Leases |
Residential mortgage (2) |
$ |
$ |
$ |
$ |
$ |
$ |
Credit card domestic | 142,599 | 3,828 | n/a | 60,785 | 1,217 | n/a |
Credit card foreign | 27,890 | 608 | n/a | | | n/a |
Home equity lines | 75,197 | | 251 | 62,546 | 3 | 117 |
Direct/Indirect consumer | 75,112 | 493 | 44 | 49,544 | 75 | 37 |
Other consumer | 9,218 | 38 | 77 | 6,725 | 15 | 61 |
Total consumer
|
575,856 | 5,085 | 1,032 | 367,980 | 1,310 | 785 |
Commercial domestic | 163,274 | 265 | 598 | 142,447 | 117 | 581 |
Commercial real estate | 36,258 | 78 | 118 | 35,766 | 4 | 49 |
Commercial lease financing | 21,864 | 26 | 42 | 20,705 | 15 | 62 |
Commercial foreign | 20,681 | 9 | 13 | 21,330 | 32 | 34 |
Total commercial
|
242,077 | 378 | 771 | 220,248 | 168 | 726 |
Total managed loans
and leases |
817,933 | 5,463 | 1,803 | 588,228 | 1,478 | 1,511 |
Managed loans in securitizations | (111,443) | (2,407) | (16) | (14,437) | (23) | |
Total held loans and leases
|
$ |
$ |
$ |
$ |
$ |
$ |
Year Ended December 31, 2006 | Year Ended December 31, 2005 (1) | |||||
---|---|---|---|---|---|---|
(Dollars in millions) | Average Loans and Leases Outstanding |
Net Losses |
Net Loss Ratio (3) |
Average Loans and Leases Outstanding |
Net Losses |
Net Loss Ratio (3) |
Residential mortgage |
$ |
$ |
0.02 % |
$ |
$ |
0.02 % |
Credit card domestic | 138,592 | 5,395 | 3.89 | 59,048 | 4,086 | 6.92 |
Credit card foreign | 24,817 | 980 | 3.95 | | | |
Home equity lines | 69,071 | 51 | 0.07 | 56,821 | 31 | 0.05 |
Direct/Indirect consumer | 68,227 | 839 | 1.23 | 46,719 | 248 | 0.53 |
Other consumer | 10,713 | 303 | 2.83 | 6,908 | 275 | 3.99 |
Total consumer
|
524,517 | 7,607 | 1.45 | 348,970 | 4,667 | 1.34 |
Commercial domestic | 153,796 | 367 | 0.24 | 130,882 | 170 | 0.13 |
Commercial real estate | 36,939 | 3 | 0.01 | 34,304 | | |
Commercial lease financing | 20,862 | (28) | (0.14) | 20,441 | 231 | 1.13 |
Commercial foreign | 23,521 | (8) | (0.04) | 18,491 | (72) | (0.39) |
Total commercial
|
235,118 | 334 | 0.14 | 204,118 | 329 | 0.16 |
Total managed loans
and leases |
759,635 | 7,941 | 1.05 | 553,088 | 4,996 | 0.90 |
Managed loans in securitizations | (107,218) | (3,402) | 3.17 | (15,870) | (434) | 2.73 |
Total held loans and leases
|
$ |
$ |
0.70 % |
$ |
$ |
0.85 % |
Variable Interest Entities
At December 31, 2006 and 2005, the assets and liabilities of the Corporation's multi-seller asset-backed commercial paper conduits that have been consolidated in accordance with FIN 46R were reflected in AFS Securities, Other Assets, and Commercial Paper and Other Short-term Borrowings. As of December 31, 2006 and 2005, the Corporation held $10.5 billion and $6.6 billion of assets in these entities, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporation's maximum loss exposure associated with these entities including unfunded lending commitments would be approximately $12.9 billion and $8.3 billion. In addition, the Corporation had net investments in leveraged lease trusts totaling $8.6 billion and $8.2 billion at December 31, 2006 and 2005. These amounts, which were reflected in Loans and Leases, represent the Corporation's maximum loss exposure to these entities in the unlikely event that the leveraged lease investments become worthless. Debt issued by the leveraged lease trusts is nonrecourse to the Corporation. The Corporation also had contractual relationships with other consolidated VIEs that engage in leasing or lending activities or real estate joint ventures. As of December 31, 2006 and 2005, the amount of assets of these entities was $3.3 billion and $750 million, and in the unlikely event that all of the assets in the VIEs become worthless, the Corporation's maximum possible loss exposure would be $1.6 billion and $212 million.
Additionally, the Corporation had significant variable interests in other VIEs that it did not consolidate because it was not deemed to be the primary beneficiary. In such cases, the Corporation does not absorb the majority of the entities' expected losses nor does it receive a majority of the entities' expected residual returns. These entities typically support the financing needs of the Corporation's customers by facilitating their access to the commercial paper markets. The Corporation functions as administrator and provides either liquidity and letters of credit, or derivatives to the VIE. The Corporation also provides asset management and related services to or invests in other special purpose vehicles that engage in lending, investing, or real estate activities. Total assets of these entities at December 31, 2006 and 2005 were approximately $51.9 billion and $36.1 billion. Revenues associated with administration, liquidity, letters of credit and other services were approximately $136 million and $122 million for the year ended December 31, 2006 and 2005. At December 31, 2006 and 2005, in the unlikely event that all of the assets in the VIEs become worthless, the Corporation's maximum loss exposure associated with these VIEs would be approximately $46.0 billion and $30.4 billion, which is net of amounts syndicated.
Management does not believe losses resulting from the Corporation's involvement with the entities discussed above will be material. See Note 1 of the Consolidated Financial Statements for additional discussion of special purpose financing entities.