Bank of America 2013 Annual Report Download - page 205

Bank of America 2013 203
The Corporation’s maximum loss exposure to consolidated and
unconsolidated CDOs totaled $2.1 billion and $3.6 billion at
December 31, 2013 and 2012. This exposure is calculated on a
gross basis and does not reflect any benefit from insurance
purchased from third parties.
At December 31, 2013, the Corporation had $1.3 billion of
aggregate liquidity exposure, included in the Other VIEs table net
of previously recorded losses, to unconsolidated CDOs which hold
senior CDO debt securities or other debt securities on the
Corporation’s behalf. For additional information, see Note 12 –
Commitments and Contingencies.
Investment Vehicles
The Corporation sponsors, invests in or provides financing, which
may be in connection with the sale of assets, to a variety of
investment vehicles that hold loans, real estate, debt securities
or other financial instruments and are designed to provide the
desired investment profile to investors or the Corporation. At
December 31, 2013 and 2012, the Corporation’s consolidated
investment vehicles had total assets of $1.2 billion and $1.3
billion. The Corporation also held investments in unconsolidated
vehicles with total assets of $5.5 billion and $3.0 billion at
December 31, 2013 and 2012. The Corporation’s maximum loss
exposure associated with both consolidated and unconsolidated
investment vehicles totaled $4.2 billion and $2.1 billion at
December 31, 2013 and 2012 comprised primarily of on-balance
sheet assets less non-recourse liabilities.
During 2013, the Corporation transferred servicing advance
receivables to independent third parties in connection with the
sale of MSRs. Portions of the receivables were transferred into
unconsolidated securitization trusts. The Corporation retained
senior interests in such receivables with a maximum loss exposure
and funding obligation of $2.5 billion, including a funded balance
of $1.9 billion at December 31, 2013, which was classified in
other debt securities carried at fair value.
Leveraged Lease Trusts
The Corporation’s net investment in consolidated leveraged lease
trusts totaled $3.8 billion and $4.4 billion at December 31, 2013
and 2012. The trusts hold long-lived equipment such as rail cars,
power generation and distribution equipment, and commercial
aircraft. The Corporation structures the trusts and holds a
significant residual interest. The net investment represents the
Corporation’s maximum loss exposure to the trusts in the unlikely
event that the leveraged lease investments become worthless.
Debt issued by the leveraged lease trusts is non-recourse to the
Corporation.
Real Estate Vehicles
The Corporation held investments in unconsolidated real estate
vehicles of $5.8 billion and $5.4 billion at December 31, 2013
and 2012, which primarily consisted of investments in
unconsolidated limited partnerships that finance the construction
and rehabilitation of affordable rental housing and commercial real
estate. An unrelated third party is typically the general partner and
has control over the significant activities of the partnership. The
Corporation earns a return primarily through the receipt of tax
credits allocated to the real estate projects. The Corporation’s risk
of loss is mitigated by policies requiring that the project qualify for
the expected tax credits prior to making its investment. The
Corporation may from time to time be asked to invest additional
amounts to support a troubled project. Such additional
investments have not been and are not expected to be significant.
Other Asset-backed Financing Arrangements
The Corporation transferred pools of securities to certain
independent third parties and provided financing for up to 75
percent of the purchase price under asset-backed financing
arrangements. At December 31, 2013 and 2012, the
Corporation’s maximum loss exposure under these financing
arrangements was $1.1 billion and $2.5 billion, substantially all
of which is classified in loans and leases. All principal and interest
payments have been received when due in accordance with their
contractual terms. These arrangements are not included in the
Other VIEs table because the purchasers are not VIEs.
NOTE 7 Representations and Warranties
Obligations and Corporate Guarantees
Background
The Corporation securitizes first-lien residential mortgage loans
generally in the form of MBS guaranteed by the GSEs or by GNMA
in the case of FHA-insured, VA-guaranteed and Rural Housing
Service-guaranteed mortgage loans. In addition, in prior years,
legacy companies and certain subsidiaries sold pools of first-lien
residential mortgage loans and home equity loans as private-label
securitizations (in certain of these securitizations, monolines or
financial guarantee providers insured all or some of the securities)
or in the form of whole loans. In connection with these transactions,
the Corporation or certain of its subsidiaries or legacy companies
make or have made various representations and warranties. These
representations and warranties, as set forth in the agreements,
related to, among other things, the ownership of the loan, the
validity of the lien securing the loan, the absence of delinquent
taxes or liens against the property securing the loan, the process
used to select the loan for inclusion in a transaction, the loan’s
compliance with any applicable loan criteria, including underwriting
standards, and the loan’s compliance with applicable federal, state
and local laws. Breaches of these representations and warranties
have resulted in and may continue to result in the requirement to
repurchase mortgage loans or to otherwise make whole or provide
other remedies to the GSEs, HUD with respect to FHA-insured
loans, VA, whole-loan investors, securitization trusts, monoline
insurers or other financial guarantors (collectively, repurchases).
In all such cases, the Corporation would be exposed to any credit
loss on the repurchased mortgage loans after accounting for any
mortgage insurance (MI) or mortgage guarantee payments that it
may receive.
Subject to the requirements and limitations of the applicable
sales and securitization agreements, these representations and
warranties can be enforced by the GSEs, HUD, VA, the whole-loan
investor, the securitization trustee or others as governed by the
applicable agreement or, in certain first-lien and home equity
securitizations where monoline insurers or other financial
guarantee providers have insured all or some of the securities
issued, by the monoline insurer or other financial guarantor, where
the contract so provides. In the case of private-label
securitizations, the applicable agreements may permit investors,
which may include the GSEs, with contractually sufficient holdings
to direct or influence action by the securitization trustee. In the
case of loans sold to parties other than the GSEs or GNMA, the
contractual liability to repurchase typically arises only if there is a