Capital One 2007 Annual Report Download - page 128

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106
have been removed from the Companys results of continuing operations for all periods presented. Prior to the shutdown of
GreenPoint Mortgage, the Company entered into commitments to originate or purchase loans whereby the interest rate of the loan was
determined prior to funding (interest rate lock commitment). Interest rate lock commitments on mortgage loans that the Company
intent to sell in the secondary market were considered freestanding derivatives. These derivatives were carried at fair value with
changes in fair value reported as a component of gain on sale of loans. In accordance with Staff Accounting Bulletin No, 105,
Application of Accounting Principles to Loan Commitments, interest rate lock commitments were initially valued at zero. Changes in
fair value subsequent to inception were determined based on current secondary market prices for underlying loans with similar
coupons, maturity and credit quality, subject to the anticipated probability that the loans would fund within the terms of the
commitment. The initial value inherent in the loan commitments at origination was recognized through gain on sale of loans when the
underlying loan was sold. Both the interest rate lock commitments and the related hedging instruments were recorded at fair value
with changes in fair value recorded in current earnings as a component of gain on sale of loans. However, as of December 31, 2007,
the Company has zero loan commitments due to the shutdown of GreenPoint Mortgage.
Generally, if interest rates increase, the value of the interest rate lock commitments and funded loans decrease and loan sale margins
are adversely impacted. The Company economically hedges the risk of overall changes in fair value of loans held-for-sale and interest
rate lock commitments generally by entering into mandatory commitments to deliver mortgage whole loans to various investors,
selling forward contracts on government backed mortgage securities and, to a lesser extent, by using futures and options to
economically hedge the fair value of interest rate lock commitments. In accordance with SFAS 133, certain of these positions qualify
as fair value hedges against a portion of the funded held-for-sale loan portfolio and result in adjustments to the carrying value of
designated loans through gain on sale based on fair value changes attributable to the hedged risk. The forward contracts, futures and
options used to economically hedge the loan commitments are accounted for as non-trading derivatives and naturally offset loan
commitment mark-to-market gains and losses recognized as a component of gain on sale.
The notional amounts of all forward contracts were zero and $3.4 billion, respectively, for the years ended December 31, 2007 and
2006. Forward contracts designated as fair value hedges associated with mortgage loans held for sale had notional values of zero and
$2.6 billion, respectively, for the year ended December 31, 2007 and 2006. The notional amounts of forward contracts used to manage
the risk associated with interest rate lock commitments on mortgage loans were zero and $0.8 billion, respectively, for the years ended
December 31, 2007 and 2006. The hedge ineffectiveness on fair value hedges included in discontinued operations was not material for
the years ended December 31, 2007 and 2006.
Note 26
Significant Concentration of Credit Risk
The Company is active in originating loans in the United States and internationally. International loans are originated primarily in
Canada and the United Kingdom. The Company reviews each potential customers credit application and evaluates the applicants
financial history and ability and willingness to repay. Loans are made on an unsecured and secured basis. Certain commercial, small
business, mortgage and automobile loans require collateral in various forms including cash deposits, automobiles and real estate, as
appropriate. The geographic distribution of the Companys loans was as follows:
December 31
2007 2006
Loans
Percentage
of Total Loans
Percentage
of Total
Geographic Region:
International
U.K. $ 8,075,609 5.34% 8,964,525 6.13%
Canada 3,585,940 2.37% 2,782,893 1.90%
Total International 11,661,549 7.71% 11,747,418 8.03%
Domestic
South 51,848,365 34.25% $ 49,604,219 33.94%
West 25,426,312 16.80% 24,897,404 17.04%
Midwest 20,691,790 13.67% 20,179,405 13.81%
Northeast 41,734,401 27.57% 39,722,822 27.18%
Total Domestic 139,700,868 92.29% 134,403,850 91.97%
151,362,417 100.00% 146,151,268 100.00%
Less securitization adjustments (49,557,390) (49,639,129)
Total $ 101,805,027 $ 96,512,139