Bank of America 2007 Annual Report Download - page 137

Note 7 – Allowance for Credit Losses
The following table summarizes the changes in the allowance for credit losses for 2007, 2006 and 2005.
(Dollars in millions) 2007 2006 2005
Allowance for loan and lease losses, January 1 $ 9,016 $ 8,045 $ 8,626
Adjustment due to the adoption of SFAS 159 (32) ––
LaSalle balance, October 1, 2007 725 ––
U.S. Trust Corporation balance, July 1, 2007 25 ––
MBNA balance, January 1, 2006 – 577 –
Loans and leases charged off (7,730) (5,881) (5,794)
Recoveries of loans and leases previously charged off 1,250 1,342 1,232
Net charge-offs (6,480) (4,539) (4,562)
Provision for loan and lease losses 8,357 5,001 4,021
Other (23) (68) (40)
Allowance for loan and lease losses, December 31 11,588 9,016 8,045
Reserve for unfunded lending commitments, January 1 397 395 402
Adjustment due to the adoption of SFAS 159 (28) ––
LaSalle balance, October 1, 2007 124 ––
Provision for unfunded lending commitments 28 9 (7)
Other (3) (7) –
Reserve for unfunded lending commitments, December 31 518 397 395
Allowance for credit losses, December 31 $12,106 $ 9,413 $ 8,440
Note 8 – Securitizations
The Corporation securitizes loans which may be serviced by the Corpo-
ration or by third parties. With each securitization, the Corporation may
retain all or a portion 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 called retained interests. These retained interests are recorded
in other assets and/or AFS debt securities and are carried at fair value or
amounts that approximate fair value with changes recorded in income or
accumulated OCI. Changes in the fair value for credit card-related interest-
only strips are recorded in card income.
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 2007 and 2006, the Corporation converted a total of $84.5 billion
(including $13.2 billion originated by other entities) and $70.4 billion
(including $20.4 billion originated by other entities), of commercial mort-
gages and first residential mortgages into mortgage-backed securities
issued through Fannie Mae, Freddie Mac, GNMA, Bank of America, N.A.
and Banc of America Mortgage Securities. At December 31, 2007 and
2006, the Corporation retained $9.2 billion (including $3.3 billion issued
prior to 2007) and $5.5 billion (including $4.2 billion issued prior to 2006)
of securities that were valued using quoted market prices. In addition, the
Corporation retained securities, including residual interests, which totaled
$196 million and $224 million at December 31, 2007 and 2006 and are
classified in trading account assets, with changes in fair value recorded in
earnings.
In 2007, the Corporation reported $633 million in gains on loans
converted into securities and sold, of which gains of $584 million were
from loans originated by the Corporation and $49 million were from loans
originated by other entities. In 2006, the Corporation reported $357 mil-
lion in gains on loans converted into securities and sold, of which gains of
$329 million were from loans originated by the Corporation and $28 mil-
lion were from loans originated by other entities. At December 31, 2007
and 2006, the Corporation had recourse obligations of $150 million and
$412 million with varying terms up to seven years on loans that had been
securitized and sold.
In 2007 and 2006, the Corporation purchased $18.1 billion and
$17.4 billion of mortgage-backed securities from third parties and
resecuritized them. Net gains, which include net interest income earned
during the holding period, totaled $13 million and $25 million. At
December 31, 2007, the Corporation retained $540 million of the secu-
rities issued in these transactions. At December 31, 2006, the Corpo-
ration did not retain any securities issued in these transactions.
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 $810 million and $775 mil-
lion in 2007 and 2006. For more information on MSRs, see Note
21 – Mortgage Servicing Rights to the Consolidated Financial Statements.
Due to current market conditions, members of the mortgage servicing
industry are evaluating a number of programs for identifying subprime
residential mortgage loan borrowers who are at risk of default and offering
loss mitigation strategies, including repayment plans and loan mod-
ifications, to such borrowers. Generally these programs require that the
borrower and subprime residential mortgage loan meet certain criteria in
order to qualify for a modification. The SEC’s Office of the Chief Account-
ant (OCA) noted that if certain loan modification requirements are met, the
OCA will not object to continued status of the transferee as a QSPE under
SFAS 140. The Corporation does not currently originate or service sig-
nificant subprime residential mortgage loans, nor does it hold a significant
amount of beneficial interests in QSPE securitizations of subprime resi-
dential mortgage loans. The Corporation does not expect that the
implementation of these programs will have a significant impact on its
financial condition and results of operations.
Bank of America 2007 135