Wells Fargo 2005 Annual Report Download - page 49

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements,Variable Interest
Entities, Guarantees and Other Commitments
We consolidate our majority-owned subsidiaries and sub-
sidiaries in which we are the primary beneficiary. Generally,
we use the equity method of accounting if we own at least
20% of an entity and we carry the investment at cost if we
own less than 20% of an entity. See Note 1 (Summary of
Significant Accounting Policies) to Financial Statements for
our consolidation policy.
In the ordinary course of business, we engage in financial
transactions that are not recorded on the balance sheet, or
may be recorded on the balance sheet in amounts that are
different than the full contract or notional amount of the
transaction. These transactions are designed to (1) meet the
financial needs of customers, (2) manage our credit, market
or liquidity risks, (3) diversify our funding sources or
(4) optimize capital, and are accounted for in accordance
with U.S. generally accepted accounting principles (GAAP).
Almost all of our off-balance sheet arrangements result
from securitizations. We routinely securitize home mortgage
loans and, from time to time, other financial assets, including
student loans, commercial mortgages and automobile receiv-
ables. We normally structure loan securitizations as sales,
in accordance with FAS 140. This involves the transfer of
financial assets to certain qualifying special-purpose entities
that we are not required to consolidate. In a securitization,
we can convert the assets into cash earlier than if we held
the assets to maturity. Special-purpose entities used in these
types of securitizations obtain cash to acquire assets by
issuing securities to investors. In a securitization, we record
a liability related to standard representations and warranties
we make to purchasers and issuers for receivables transferred.
Also, we generally retain the right to service the transferred
receivables and to repurchase those receivables from the
special-purpose entity if the outstanding balance of the
receivable falls to a level where the cost exceeds the benefits
of servicing such receivables.
At December 31, 2005, securitization arrangements
sponsored by the Company consisted of $121 billion in
securitized loan receivables, including $75 billion of home
mortgage loans. At December 31, 2005, the retained servicing
rights and other beneficial interests related to these securiti-
zations were $4,426 million, consisting of $3,501 million in
securities, $784 million in servicing assets and $141 million
in other retained interests. Related to our securitizations,
we have committed to provide up to $40 million in
credit enhancements.
We also hold variable interests greater than 20% but
less than 50% in certain special-purpose entities formed to
provide affordable housing and to securitize corporate
debt that had approximately $3 billion in total assets at
December 31, 2005. We are not required to consolidate
these entities. Our maximum exposure to loss as a result of
our involvement with these unconsolidated variable interest
entities was approximately $870 million at December 31, 2005,
predominantly representing investments in entities formed to
invest in affordable housing. We, however, expect to recover
our investment over time primarily through realization of
federal low-income housing tax credits.
For more information on securitizations including sales
proceeds and cash flows from securitizations, see Note 20
(Securitizations and Variable Interest Entities) to Financial
Statements.
Home Mortgage, in the ordinary course of business, origi-
nates a portion of its mortgage loans through unconsolidated
joint ventures in which we own an interest of 50% or less.
Loans made by these joint ventures are funded by Wells Fargo
Bank, N.A., or an affiliated entity, through an established line
of credit and are subject to specified underwriting criteria.
At December 31, 2005, the total assets of these mortgage
origination joint ventures were approximately $55 million.
We provide liquidity to these joint ventures in the form of
outstanding lines of credit and, at December 31, 2005, these
liquidity commitments totaled $358 million.
We also hold interests in other unconsolidated joint
ventures formed with unrelated third parties to provide
efficiencies from economies of scale. A third party manages
our real estate lending services joint ventures and provides
customers title, escrow, appraisal and other real estate related
services. Our merchant services joint venture includes credit
card processing and related activities. At December 31, 2005,
total assets of our real estate lending and merchant services
joint ventures were approximately $715 million.
When we acquire brokerage, asset management and
insurance agencies, the terms of the acquisitions may provide
for deferred payments or additional consideration, based
on certain performance targets. At December 31, 2005, the
amount of contingent consideration we expected to pay was
not significant to our financial statements.
As a financial services provider, we routinely commit to
extend credit, including loan commitments, standby letters
of credit and financial guarantees. A significant portion of
commitments to extend credit may expire without being drawn
upon. These commitments are subject to the same credit
policies and approval process used for our loans. For more
information, see Note 6 (Loans and Allowance for Credit
Losses) and Note 24 (Guarantees) to Financial Statements.
In our venture capital and capital markets businesses, we
commit to fund equity investments directly to investment
funds and to specific private companies. The timing of future
cash requirements to fund these commitments generally
depends on the venture capital investment cycle, the period
over which privately-held companies are funded by venture
capital investors and ultimately sold or taken public. This