Morgan Stanley 2014 Annual Report Download - page 257

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
often may have recourse to the underlying assets held by the SPEs in the event payments are required under such
liquidity facilities as well as make-whole or recourse provisions with the trust sponsors. Primarily all of the
underlying assets in the SPEs are investment grade. Liquidity facilities provided to municipal tender option bond
trusts are classified as derivatives.
Whole Loan Sale Guarantees. The Company has provided, or otherwise agreed to be responsible for,
representations and warranties regarding certain whole loan sales. Under certain circumstances, the Company
may be required to repurchase such assets or make other payments related to such assets if such representations
and warranties were breached. The Company’s maximum potential payout related to such representations and
warranties is equal to the current unpaid principal balance (“UPB”) of such loans. The Company has information
on the current UPB only when it services the loans. The amount included in the above table for the maximum
potential payout of $23.6 billion includes the current UPB where known of $4.7 billion and the UPB at the time
of sale of $18.9 billion when the current UPB is not known. The UPB at the time of the sale of all loans covered
by these representations and warranties was approximately $44.9 billion. The related liability primarily relates to
sales of loans to the federal mortgage agencies.
Securitization Representations and Warranties. As part of the Company’s Institutional Securities business
segment’s securitization and related activities, the Company has provided, or otherwise agreed to be responsible
for, representations and warranties regarding certain assets transferred in securitization transactions sponsored by
the Company. The extent and nature of the representations and warranties, if any, vary among different
securitizations. Under certain circumstances, the Company may be required to repurchase such assets or make
other payments related to such assets if such representations and warranties are breached. The maximum
potential amount of future payments the Company could be required to make would be equal to the current
outstanding balances of, or losses associated with, the assets subject to breaches of such representations and
warranties. The amount included in the above table for the maximum potential payout includes the current UPB
where known and the UPB at the time of sale when the current UPB is not known.
Between 2004 and 2014, the Company sponsored approximately $148 billion of RMBS primarily containing
U.S. residential loans that were outstanding at December 31, 2014. Of that amount, the Company made
representations and warranties relating to approximately $47.0 billion of loans and agreed to be responsible for
the representations and warranties made by third-party sellers, many of which are now insolvent, on
approximately $21 billion of loans. At December 31, 2014, the Company had recorded $98 million in the
Company’s consolidated financial statements for payments owed as a result of breach of representations and
warranties made in connection with these residential mortgages. At December 31, 2014, the current UPB for all
the residential assets subject to such representations and warranties was approximately $15.5 billion, and the
cumulative losses associated with U.S. RMBS were approximately $14.1 billion. The Company did not make, or
otherwise agree to be responsible for, the representations and warranties made by third-party sellers on
approximately $79.9 billion of residential loans that it securitized during that time period.
The Company also made representations and warranties in connection with its role as an originator of certain
commercial mortgage loans that it securitized in CMBS. Between 2004 and 2014, the Company originated
approximately $56 billion and $7 billion of U.S. and non-U.S. commercial mortgage loans, respectively, that
were placed into CMBS sponsored by the Company that were outstanding at December 31, 2014. At
December 31, 2014, the Company had not accrued any amounts in the Company’s consolidated financial
statements for payments owed as a result of breach of representations and warranties made in connection with
these commercial mortgages. At December 31, 2014, the current UPB for all U.S. commercial mortgage loans
subject to such representations and warranties was $33.7 billion. For the non-U.S. commercial mortgage loans,
the amount included in the above table for the maximum potential payout includes the current UPB when known
of $1.8 billion and the UPB at the time of sale when the current UPB is not known of $0.4 billion.
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