Citibank 2009 Annual Report Download - page 248

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Certain mortgage loans
Citigroup has elected the fair value option for certain purchased and
originated prime fixed-rate and conforming adjustable-rate first mortgage
loans held-for-sale. These loans are intended for sale or securitization and
are hedged with derivative instruments. The Company has elected the fair
value option to mitigate accounting mismatches in cases where hedge
In millions of dollars December 31, 2009 December 31, 2008
Carrying amount reported on the Consolidated Balance Sheet $3,338 $4,273
Aggregate fair value in excess of unpaid principal balance 55 138
Balance of non-accrual loans or loans more than 90 days past due 49
Aggregate unpaid principal balance in excess of fair value for non-accrual loans or loans more than 90 days past due 32
The changes in fair values of these mortgage loans are reported in Other
revenue in the Company’s Consolidated Statement of Income. The changes
in fair value during the years ended December 31, 2009 and 2008 due to
instrument-specific credit risk resulted in a $10 million loss and $32 million
loss, respectively. Related interest income continues to be measured based
on the contractual interest rates and reported as such in the Consolidated
Statement of Income.
Mortgage servicing rights
The Company accounts for mortgage servicing rights (MSRs) at fair value.
Fair value for MSRs is determined using an option-adjusted spread valuation
approach. This approach consists of projecting servicing cash flows under
multiple interest-rate scenarios and discounting these cash flows using
risk-adjusted rates. The model assumptions used in the valuation of MSRs
include mortgage prepayment speeds and discount rates. The fair value of
MSRs is primarily affected by changes in prepayments that result from shifts
in mortgage interest rates. In managing this risk, the Company hedges a
significant portion of the values of its MSRs through the use of interest-rate
derivative contracts, forward-purchase commitments of mortgage-backed
securities, and purchased securities classified as trading. See Note 23 to the
Consolidated Financial Statements for further discussions regarding the
accounting and reporting of MSRs.
These MSRs, which totaled $6.5 billion and $5.7 billion as of
December 31, 2009 and 2008, respectively, are classified as Mortgage
servicing rights on Citigroup’s Consolidated Balance Sheet. Changes in fair
value of MSRs are recorded in Commissions and fees in the Company’s
Consolidated Statement of Income.
Certain structured liabilities
The Company has elected the fair value option for certain structured liabilities
whose performance is linked to structured interest rates, inflation or currency risks
(“structured liabilities”). The Company elected the fair value option, because
these exposures are considered to be trading-related positions and, therefore, are
managed on a fair value basis. These positions will continue to be classified as
debt, deposits or derivatives (Trading account liabilities) on the Company’s
Consolidated Balance Sheet according to their legal form.
For those structured liabilities classified as Long-term debt for which the
fair value option has been elected, the aggregate unpaid principal balance
exceeded the aggregate fair value by $125 million and $671 million as of
December 31, 2009 and 2008, respectively.
The change in fair value for these structured liabilities is reported in
Principal transactions in the Company’s Consolidated Statement of Income.
Related interest expense is measured based on the contractual interest
rates and reported as such in the Consolidated Income Statement.
Certain non-structured liabilities
The Company has elected the fair value option for certain non-structured
liabilities with fixed and floating interest rates (“non-structured liabilities”).
The Company has elected the fair value option where the interest-rate risk
of such liabilities is economically hedged with derivative contracts or the
proceeds are used to purchase financial assets that will also be accounted
for at fair value through earnings. The election has been made to mitigate
accounting mismatches and to achieve operational simplifications. These
positions are reported in Short-term borrowings and Long-term debt on the
Company’s Consolidated Balance Sheet.
For those non-structured liabilities classified as Short-term borrowings
for which the fair value option has been elected, the aggregate unpaid
principal balance exceeded the aggregate fair value of such instruments by
$220 million as of December 31, 2008.
For non-structured liabilities classified as Long-term debt for which the
fair value option has been elected, the aggregate unpaid principal balance
exceeded the aggregate fair value by $1,542 million and $856 million as
of December 31, 2009 and 2008, respectively. The change in fair value for
these non-structured liabilities is reported in Principal transactions in the
Company’s Consolidated Statement of Income.
Related interest expense continues to be measured based on the contractual
interest rates and reported as such in the Consolidated Income Statement.
accounting is complex and to achieve operational simplifications. The fair
value option was not elected for loans held-for-investment, as those loans are
not hedged with derivative instruments.
The following table provides information about certain mortgage loans
carried at fair value: