Bank of America 2002 Annual Report Download - page 91

BANK OF AMERICA 2002 89
NOTE 8 Special Purpose Financing Entities
The Corporation securitizes assets and may retain a portion or all of
the securities, subordinated tranches, interest only strips and, in some
cases, a cash reserve account, all of which are considered retained
interests in the securitized assets. Those assets may be serviced by the
Corporation or by third parties to whom the servicing has been sold. See
Note 1 for a more detailed discussion of securitizations.
Mortgage Banking
In conjunction with or shortly after closing, the Corporation securitizes
the majority of its mortgage loan originations. In 2002 and 2001, the
Corporation converted a total of $53.7 billion (including $2.8 billion
originated by other entities on behalf of the Corporation) and $52.9 bil-
lion, respectively, of residential first mortgages into mortgage-backed
securities issued through Fannie Mae, Freddie Mac, Ginnie Mae and
Bank of America Mortgage Securities. The Corporation did not retain
any of the securities issued in 2002. At December 31, 2002, $1.8 billion
of securities issued prior to 2002 had been retained. At December 31,
2001, the Corporation had retained $9.7 billion in securities. These
retained interests are valued using quoted market values.
For 2002, the Corporation reported $480 million in gains on
loans converted into securities and sold, of which $408 million was
from loans originated by the Corporation and $72 million was from
loans originated by other entities on behalf of the Corporation. For
2001, the Corporation reported $637 million in gains on loans converted
into securities and sold. At December 31, 2002, the Corporation had
recourse obligations of $5.9 billion with varying terms up to seven years
on loans that had been securitized and sold.
In addition to the retained interests in the securities, the
Corporation has retained the servicing asset and Excess Spread
Certificates (the Certificates) from securitized mortgage loans (see the
Mortgage Banking Assets section of Note 1). Mortgage Certificate and
servicing fee income on all loans serviced, including securitizations,
was $944 million and $1.1 billion in 2002 and 2001, respectively.
The Certificates of $2.1 billion at December 31, 2002 compared to
$3.9 billion at December 31, 2001 are classified as mortgage banking
assets and marked to market with the unrealized gains or losses
recorded in trading account profits. The fair value of the Certificates
decreased primarily due to an increase in mortgage prepayments and
expected future prepayments, that resulted primarily from a signifi-
cant decrease in mortgage interest rates. At December 31, 2002, key
economic assumptions and the sensitivities of the fair value of the
Certificates to immediate changes in those assumptions were ana-
lyzed. The sensitivity analysis included the impact on fair value of
modeled prepayment and discount rate changes under favorable and
adverse conditions. A decrease of 10 percent and 20 percent in mod-
eled prepayments would result in an increase in value ranging from
$188 million to $406 million, and an increase in modeled prepay-
ments of 10 percent and 20 percent would result in a decrease in
value ranging from $163 million to $305 million. A decrease of 100
and 200 basis points in the discount rate would result in an increase in
value ranging from $87 million to $182 million, and an increase in the
discount rate of 100 and 200 basis points would result in a decrease
in value ranging from $80 million to $153 million. See Note 1 for
additional disclosures related to the Certificates.
Other Securitizations
In December 2001, in conjunction with the strategic decision to exit
the subprime real estate lending business, the Corporation securi-
tized $17.5 billion of subprime real estate loans in two bond-insured
transactions and retained all of the related AAA-rated securities in the
available-for-sale portfolio. During 2002, the Corporation re-securi-
tized and sold $10.4 billion of those securities to third parties. At
December 31, 2002, $3.5 billion of the AAA-rated securities remained
in the available-for-sale portfolio.
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 is only paid out if over-col-
lateralization is not sufficient to absorb losses and certain other
conditions are met. The Corporation projects no payments will be due
over the life of the contract, which is approximately seven years.
NOTE 7 Allowance for Credit Losses
The table below summarizes the changes in the allowance for credit losses on loans and leases for 2002, 2001 and 2000:
(Dollars in millions) 2002 2001 2000
Balance, January 1 $ 6,875 $ 6,838 $ 6,828
Loans and leases charged off (4,460) (4,844) (2,995)
Recoveries of loans and leases previously charged off 763 600 595
Net charge-offs (3,697) (4,244) (2,400)
Provision for credit losses 3,697 4,287 2,535
Other, net (24) (6) (125)
Balance, December 31 $ 6,851 $ 6,875 $ 6,838