Dominion Power 2000 Annual Report Download - page 53

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The weighted-average rates (per annum) for key economic
assumptions used in measuring the retained interests from securiti-
zations completed during 2000 were as follows:
Residential
Mortgage Loans Servicing Rights
Prepayment speed **
Weighted-average life (in years) 6.05/2.44 3.63
Expected credit losses 2.26% 2.26%
Residual cash flows discounted at 15.07% 14.09%
*Fixed rate loans ramp up to 24 Constant Prepayment Rate (CPR) over 13 months and thereafter.
Adjustable rate loans ramp up to 40 CPR over 13 months; ramping down to 24 CPR over 32
months and thereafter.
Two-year hybrid loans ramp up to 29 CPR over 13 months; ramping up to 57 CPR in month 21
ramping down to 29 CPR over 18 months and thereafter.
Three-year hybrid loans ramp up to 29 CPR over 13 months; ramping up to 57 CPR in month 34
ramping down to 29 CPR over 18 months and thereafter.
As a result of changes in the market conditions during the first
half of 2000, the discount rate used to value interest-only residual
assets was increased from 12% to 17%, and a loss of $106 million
was recognized. In addition, due to the events described in Note 6,
these assets were transferred from available-for-sale to trading.
Accordingly, these assets are recorded at fair value.
Activity for the interest-only residual assets and servicing rights
is summarized as follows:
(millions) Residual Assets* Servicing Rights Total
Balance at January 1, 1998 $ 213 $ 18 $ 231
Retained from securitization 157 24 181
Amortization (3) (7) (10)
Cash received (57) (57)
Fair value adjustment (28) (28)
Balance at December 31, 1998 282 35 317
Retained from securitization 169 16 185
Amortization (7) (12) (19)
Cash received (79) (79)
Fair value adjustment (18) (18)
Balance at December 31, 1999 347 39 386
Retained from securitization 99 18 117
Amortization (16) (7) (23)
Cash received (51) (51)
Gain on trading securities 25 25
Fair value adjustment (102) (5) (107)
Balance at December 31, 2000 $ 302 $ 45 $ 347
*Includes prepayment penalties.
At December 31, 2000, key economic assumptions and the sensi-
tivity of the current fair value of residual cash flows to immediate
10 percent and 20 percent adverse changes in those assumptions
are as follows:
Residential
(millions, except percentages) Mortgage Loans Servicing Rights
Carrying amount/fair value of retained interests $301 $ 46
Weighted-average life (in years) 5.23/1.74 3.64
Prepayment speed assumption (annual rate) (1) (1)
Impact on fair value of 10% adverse change $ (20) $ (4)
Impact on fair value of 20% adverse change $ (37) $ (6)
Expected credit losses (annual rate) 2.28% 2.28%
Impact on fair value of 10% adverse change $ (10) N/A
Impact on fair value of 20% adverse change $ (20) N/A
Residual cash flows discount rate (annual) 17% 15%
Impact on fair value of 10% adverse change $(9) $(1)
Impact on fair value of 20% adverse change $ (20) $ (3)
Interest rates on variable and
adjustable contracts (2) (2)
Impact on fair value of 10% adverse change $(7) N/A
Impact on fair value of 20% adverse change $ (18) N/A
(1) Fixed rate loans ramp up to 24 CPR over 13 months and thereafter for series 96-1, 96-2, 97-1,
99-3, 99-4, 99-5 and 00-1; ramp up to 22 CPR over 13 months and thereafter for series 98-1
and 99-2; ramp up to 27 CPR over 13 months and thereafter for series 97-2 and 97-3.
Adjustable rate loans ramp up to 40 CPR over 13 months; ramping down to 24 CPR over
32 months and thereafter.
Two-year hybrid loans ramp up to 30 CPR over 13 months; ramping up to 60 CPR in month 21
ramping down to 30 CPR over 18 months and thereafter.
Three-year hybrid loans ramp up to 30 CPR over 13 months; ramping up to 60 CPR in month 33
ramping down to 30 CPR over 18 months and thereafter.
(2) Based on the full forward 1-month LIBOR, 6-month LIBOR or 1 year CMT through 1/1/2004
based on the variable component of the variable rate contracts.
These sensitivities are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on a 10
percent variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table, the effect of a
variation in a particular assumption on the fair value of the retained
interest is calculated without changing any other assumption; in
reality, changes in one factor may result in changes in another (for
example, increases in market interest rates may result in lower pre-
payments and increased credit losses), which might magnify or
counteract the sensitivities.