Bank of America 2004 Annual Report Download - page 118

BANK OF AMERICA 2004 117
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. The Corporation
also uses other special purpose financing entities to access the
commercial paper market and for other lending, leasing and real
estate activities. See Note 1 of the Consolidated Financial
Statements for a more detailed discussion of securitizations and
other special purpose financing entities.
Mortgage-related Securitizations
The Corporation securitizes the majority of its residential mortgage
loan originations in conjunction with or shortly after loan closing. In
addition, the Corporation may, from time to time, securitize commer-
cial mortgages and first residential mortgages that it originates or
purchases from other entities. In 2004 and 2003, the Corporation
converted a total of $96.9 billion (including $18.0 billion originated
by other entities) and $121.1 billion (including $13.0 billion originated
by other entities), respectively, of residential first mortgages and com-
mercial mortgages into mortgage-backed securities issued through
Fannie Mae, Freddie Mac, Government National Mortgage Association
(Ginnie Mae), Bank of America, N.A. and Banc of America Mortgage
Securities. At December 31, 2004 and 2003, the Corporation retained
$9.2 billion (including $1.2 billion issued prior to 2004) and $1.7 bil-
lion of securities, respectively. At December 31, 2004, these retained
interests were valued using quoted market prices.
For 2004, the Corporation reported $952 million in gains on
loans converted into securities and sold, of which $886 million was
from loans originated by the Corporation and $66 million was from
loans originated by other entities. For 2003, the Corporation reported
$2.4 billion in gains on loans converted into securities and sold, of
which $2.0 billion was from loans originated by the Corporation
and $381 million was from loans originated by other entities. At
December 31, 2004, the Corporation had recourse obligations of
$558 million 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 MSRs from the sale or securitization of res-
idential mortgage loans. Servicing fee and ancillary fee income on all
loans serviced, including securitizations, was $568 million and $314
million in 2004 and 2003, respectively. The activity in MSRs for 2004
and 2003 is as follows:
(Dollars in millions) 2004 2003
Balance, January 1 $ 479 $ 499
Additions(1) 3,036 201
Amortization (360) (145)
Change in value attributed to SFAS 133 hedged MSRs(2) (210) –
Impairment, net of recoveries (463) (76)
Balance, December 31(3,4) $ 2,482 $ 479
(1) Includes $2.2 billion of Certificates converted to MSRs on June 1, 2004.
(2) Excludes $228 of offsetting derivative hedge gains recognized in Mortgage Banking Income
for 2004.
(3) Net of impairment allowance of $361 for 2004.
(4) 2003 does not include $2.3 billion of Certificates.
The estimated fair value of MSRs was $2.5 billion and $479 mil-
lion at December 31, 2004 and 2003, respectively. The additions
during 2004 included $2.2 billion of MSRs as a result of the con-
version of Certificates discussed in Note 1 of the Consolidated
Financial Statements.
The key economic assumptions used in valuations of MSRs
include modeled prepayment rates and resultant expected weighted
average lives of the MSRs and the option adjusted spread (OAS) levels.
An OAS model runs multiple interest rate scenarios and projects pre-
payments specific to each one of those interest rate scenarios.
As of December 31, 2004, the modeled weighted average lives
of MSRs related to fixed and adjustable rate loans (including hybrid
ARMs) were 4.65 years and 3.02 years, respectively. A decrease of
10 and 20 percent in modeled prepayments would extend the
expected weighted average lives for MSRs related to fixed rate loans
to 5.01 years and 5.40 years, respectively, and would extend the
expected weighted average lives for MSRs related to adjustable rate
loans to 3.32 years and 3.68 years, respectively. The expected exten-
sion of weighted average lives would increase the value of MSRs by
a range of $143 million to $295 million. An increase of 10 and 20
percent in modeled prepayments would reduce the expected
weighted average lives for MSRs related to fixed rate loans to 4.38
years and 4.11 years, respectively, and would reduce the expected
weighted average lives for MSRs related to adjustable rate loans to
2.78 years and 2.57 years, respectively. The expected reduction of
weighted average lives would decrease the value of MSRs by a range
of $112 million to $219 million. A decrease of 100 and 200 basis
points (bps) in the OAS level would result in an increase in the value
of MSRs ranging from $89 million to $185 million, and an increase
of 100 and 200 bps in the OAS level would result in a decrease in
the value of MSRs ranging from $83 million to $160 million.
For purposes of evaluating and measuring impairment, the
Corporation stratifies the portfolio based on the predominant risk
characteristics of loan type and note rate. Indicated impairment, by
risk stratification, is recognized as a reduction in Mortgage Banking
Income, through a valuation allowance, for any excess of adjusted car-
rying value over estimated fair value. Impairment, net of recoveries of
MSRs totaled $463 million for 2004. For 2003, changes in the value
of the Certificates and MSRs were recognized as Trading Account
Profits. Impairment charges in 2004 included changes to valuation
assumptions and prepayment adjustments related to expectations
regarding future prepayment speeds and other assumptions totaling
$261 million. Additional impairment reflects decreases in the value of
MSRs primarily due to increased probability of prepayments driven by
decreases in market interest rates during the second half of 2004.
Other Securitizations
As a result of the Merger, the Corporation acquired an interest in sev-
eral credit card, home equity loan and commercial loan securitization
vehicles, which had aggregate debt securities outstanding of $10.3
billion as of December 31, 2004. During 2004, the Corporation secu-
ritized $2.0 billion of automobile loans and retained $1.7 billion of
the AAA securities, which are held in the AFS securities portfolio.