Bank of America 2006 Annual Report Download - page 122

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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 Corpo-
ration 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 sensi-
tivity table below which sets forth the sensitivity of the fair value of
residual interests to changes in key assumptions. In 2005, the Corpo-
ration 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 mil-
lion 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 tranch-
es, 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 mil-
lion 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 secu-
rities outstanding for the Corporation’s automobile securitization vehicles
were $5.2 billion and $4.0 billion, and the Corporation held residual inter-
ests 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 max-
imum 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 cer-
tain residual interests that continue to be held by the Corporation
(included in Other Assets) in securitizations and the sensitivity of the cur-
rent 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)
$ 2,929
$ 203
$ 811
$ 290
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 structures – monthly payment rate
11.2 - 19.8%
12.1%
Amortizing structures – annual 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
$43
$2
$7
$8
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
$86
$3
$16
$7
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
$12
$–
$5
$5
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)
(1) Consumer finance includes mortgage loans purchased and securitized in 2006 and originated consumer finance loans that were securitized in 2001, all of which are serviced by third parties.
(2) Residual interests include interest-only strips, subordinated tranches, subordinated interests in accrued interest and fees on the securitized receivables and cash reserve accounts which are carried at fair value or amounts
that approximate fair value. Residual interests in purchased mortgage loans totaling $224 million at December 31, 2006 are classified in Trading Account Assets. Other residual interests are classified in Other Assets.
(3) Annual rates of expected credit losses are presented for credit card securitizations. Cumulative lifetime rates of expected credit losses (incurred plus projected) are presented for consumer finance securitizations.
120
Bank of America 2006