Bank of America 2007 Annual Report Download - page 165

Loans Held-for-Sale
The Corporation also elected to account for certain loans held-for-sale at
fair value. Electing to use fair value allows a better offset of the changes
in fair values of the loans and the derivative instruments used to econom-
ically hedge them without the burden of complying with the requirements
for hedge accounting under SFAS 133. The Corporation has not elected to
fair value other loans held-for-sale primarily because these loans are float-
ing rate loans that are not economically hedged using derivative instru-
ments. Fair values for loans held-for-sale are based on quoted market
prices, where available, or are determined by discounting estimated cash
flows using interest rates approximating the Corporation’s current origi-
nation rates for similar loans and adjusted to reflect the inherent credit
risk. At December 31, 2007, residential mortgage loans, commercial
mortgage loans, and other loans held-for-sale for which the fair value
option was elected had an aggregate fair value of $15.77 billion and an
aggregate outstanding principal balance of $16.72 billion and were
recorded in other assets. Interest income on these loans is recorded in
other interest income. Net gains (losses) resulting from changes in fair
value of these loans, including realized gains (losses) on sale, of $333
million were recorded in mortgage banking income, $(348) million were
recorded in trading account profits (losses), and $(58) million were
recorded in other income during 2007. These changes in fair value are
mostly offset by hedging activities. An immaterial portion of these amounts
was attributable to changes in instrument-specific credit risk. The adoption
of SFAS 159 resulted in an increase of $256 million in mortgage banking
income, and in an increase of $212 million in noninterest expense for
2007. Subsequent to the adoption of SFAS 159, mortgage loan origination
costs are recognized in noninterest expense when incurred. Previously,
mortgage loan origination costs would have been capitalized as part of the
carrying amount of the loans and recognized as a reduction of mortgage
banking income upon the sale of such loans.
Debt Securities
Effective January 1, 2007, the Corporation elected to fair value $3.7 bil-
lion of AFS debt securities through earnings. Changes in fair value result-
ing from foreign currency exposure, which was the primary driver of fair
value for these securities, had previously been hedged by derivatives that
qualified for fair value hedge accounting in accordance with SFAS 133.
Electing the fair value option allows the Corporation to eliminate the bur-
den of complying with the requirements for hedge accounting under SFAS
133 without introducing accounting volatility. Following election of the fair
value option, these securities were reclassified to trading account assets.
The Corporation did not elect the fair value option for other AFS debt secu-
rities because they were not hedged by derivatives that qualified for hedge
accounting in accordance with SFAS 133.
Structured Reverse Repurchase Agreements
The Corporation elected to fair value certain structured reverse repurchase
agreements which were hedged with derivatives which qualified for fair
value hedge accounting in accordance with SFAS 133. Election of the fair
value option allows the Corporation to reduce the burden of complying with
the requirements of hedge accounting under SFAS 133. At December 31,
2007, these instruments had an aggregate fair value of $2.58 billion and
a principal balance of $2.54 billion recorded in federal funds sold and
securities purchased under agreements to resell. Interest earned on these
instruments continues to be recorded in interest income. Net gains result-
ing from changes in fair value of these instruments of $23 million were
recorded in other income for 2007. The Corporation did not elect to fair
value other financial instruments within the same balance sheet category
because they were not economically hedged using derivatives.
Long-term Deposits
The Corporation elected to fair value certain long-term fixed rate deposits
which are economically hedged with derivatives. At December 31, 2007,
these instruments had an aggregate fair value of $2.00 billion and princi-
pal balance of $1.99 billion recorded in interest-bearing deposits. Interest
paid on these instruments continues to be recorded in interest expense.
Net losses resulting from changes in fair value of these instruments of
$26 million were recorded in other income for 2007. Election of the fair
value option will allow the Corporation to reduce the accounting volatility
that would otherwise result from the accounting asymmetry created by
accounting for the financial instruments at historical cost and the
economic hedges at fair value. The Corporation did not elect to fair value
other financial instruments within the same balance sheet category
because they were not economically hedged using derivatives.
Fair Value Measurement
SFAS 157 defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly trans-
action between market participants on the measurement date. For addi-
tional information on how the Corporation measures fair value, see Note 1
– Summary of Significant Accounting Principles to the Consolidated Finan-
cial Statements.
Bank of America 2007 163