Wells Fargo 2010 Annual Report Download - page 132

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Note 5: Securities Available for Sale (continued)
For asset-backed securities (e.g., residential MBS), we
estimated expected future cash flows of the security by
estimating the expected future cash flows of the underlying
collateral and applying those collateral cash flows, together with
any credit enhancements such as subordinated interests owned
by third parties, to the security. The expected future cash flows
of the underlying collateral are determined using the remaining
contractual cash flows adjusted for future expected credit losses
(which consider current delinquencies and nonperforming assets
(NPAs), future expected default rates and collateral value by
vintage and geographic region) and prepayments. The expected
cash flows of the security are then discounted at the interest rate
used to recognize interest income on the security to arrive at a
present value amount. Total credit impairment losses on
residential MBS that we do not intend to sell are shown in the
table below. The table also presents a summary of the significant
inputs considered in determining the measurement of the credit
loss component recognized in earnings for residential MBS.
Year ended
December 31,
($ in millions) 2010
2009
Credit impairment losses on residential MBS
Investment grade $ 5
24
Non-investment grade 170
567
Total credit impairment losses on residential MBS $ 175
591
Significant inputs (non-agency – non-investment grade MBS)
Expected remaining life of loan losses (1):
Range (2) 1-43
% 0-
58
Credit impairment distribution (3):
0 - 10% range 52
56
10 - 20% range 29
27
20 - 30% range 17
12
Greater than 30% 2
5
Weighted average (4) 9
11
Current subordination levels (5):
Range (2) 0-25
0-
44
Weighted average (4) 7
8
Prepayment speed (annual CPR (6)):
Range (2) 2-27
5-
25
Weighted average (4) 14
11
(1) Represents future expected credit losses on underlying pool of loans expressed as a percentage of total current outstanding loan balance.
(2) Represents the range of inputs/assumptions based upon the individual securities within each category.
(3) Represents distribution of credit impairment losses recognized in earnings categorized based on range of expected remaining life of loan losses. For example 52% of credit
impairment losses recognized in earnings for the year ended December 31, 2010, had expected remaining life of loan loss assumptions of 0 to 10%.
(4) Calculated by weighting the relevant input/assumption for each individual security by current outstanding amortized cost basis of the security.
(5) Represents current level of credit protection (subordination) for the securities, expressed as a percentage of total current underlying loan balance.
(6) Constant prepayment rate.
130