Bank of America 2006 Annual Report Download - page 121

Note 8 – Mortgage Servicing Rights
Effective January 1, 2006, the Corporation adopted SFAS 156 and
accounts for consumer-related MSRs at fair value with changes in fair
value recorded in the Consolidated Statement of Income in Mortgage
Banking Income. The Corporation economically hedges these MSRs with
certain derivatives such as options and interest rate swaps. Prior to Jan-
uary 1, 2006, consumer-related MSRs were accounted for on a lower of
cost or market basis and hedged with derivatives that qualified for SFAS
133 hedge accounting.
The following table presents activity for consumer-related MSRs for
2006 and 2005.
(Dollars in millions) 2006 2005
Balance, January 1 $2,658 $2,358
MBNA balance, January 1, 2006 9 –
Additions 572 860
Sales of MSRs (71) (176)
Impact of customer payments (713) –
Amortization – (612)
Other changes in MSR market value
(1)
414 228
Balance, December 31 (2) $2,869 $2,658
(1) For 2006, amount reflects changes in discount rates and prepayment speed assumptions, mostly due to changes in interest rates. For 2005, amount reflects $291 million related to change in value attributed to SFAS 133
hedged MSRs, and $63 million of impairments.
(2) Before the adoption of SFAS 156, there was an impairment allowance of $257 million at December 31, 2005.
Commercial-related MSRs are accounted for using the amortization
method (i.e., lower of cost or market). Commercial-related MSRs were
$176 million and $148 million at December 31, 2006 and 2005 and are
not included in the table above.
The key economic assumptions used in valuations of MSRs included
modeled prepayment rates and resultant weighted-average lives of the
MSRs and the option adjusted spread (OAS) levels. An OAS model runs
multiple interest rate scenarios and projects prepayments specific to each
one of those interest rate scenarios.
As of December 31, 2006, the fair value of consumer-related MSRs
was $2.9 billion, and the modeled weighted-average lives of MSRs related
to fixed and adjustable rate loans (including hybrid Adjustable Rate Mort-
gages) were 4.98 years and 3.19 years. The following table presents the
sensitivity of the weighted-average lives and fair value of MSRs to changes
in modeled assumptions.
December 31, 2006
Change in
Weighted-average lives Change in
Fair value
(Dollars in millions) Fixed Adjustable
Prepayment rates
Impact of 10% decrease
0.33 years 0.26 years $ 135
Impact of 20% decrease 0.70 0.58 289
Impact of 10% increase
(0.29) (0.23) (120)
Impact of 20% increase (0.55) (0.42) (227)
OAS level
Impact of 100 bps decrease n/a n/a 109
Impact of 200 bps decrease n/a n/a 227
Impact of 100 bps increase
n/a n/a (101)
Impact of 200 bps increase n/a n/a (195)
n/a = not applicable
Note 9 – Securitizations
The Corporation securitizes assets and may continue to hold a portion or
all of the securities, subordinated tranches, interest-only strips, sub-
ordinated interests in accrued interest and fees on the securitized receiv-
ables, 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 origi-
nations 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 enti-
ties. 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 mort-
gages 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 Secu-
rities. 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 mil-
lion 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.
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