Wells Fargo 2005 Annual Report Download - page 98

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96
In the normal course of creating securities to sell to
investors, we may sponsor special-purpose entities that
hold, for the benefit of the investors, financial instruments
that are the source of payment to the investors. Special-purpose
entities are consolidated unless they meet the criteria for
a qualifying special-purpose entity in accordance with
FAS 140 or are not required to be consolidated under
existing accounting guidance.
For securitizations completed in 2005 and 2004, we
used the following assumptions to determine the fair value
of mortgage servicing rights and other retained interests at
the date of securitization.
Key economic assumptions and the sensitivity of the
current fair value to immediate adverse changes in those
assumptions at December 31, 2005, for the AAA-rated
floating-rate mortgage-backed securities related to residential
mortgage loan securitizations are presented in the table on
the next page. The fair value of these securities was determined
using quoted market prices.
(in millions) Year ended December 31,
2005 2004
Mortgage Other Mortgage Other
loans financial loans financial
assets assets
Sales proceeds from
securitizations $40,982 $225 $33,550 $ —
Servicing fees 154 — 88 —
Cash flows on other
retained interests 560 6 138 11
Note 20: Securitizations and Variable Interest Entities
We routinely originate, securitize and sell into the secondary
market home mortgage loans and, from time to time, other
financial assets, including student loans, commercial mortgage
loans, home equity loans, auto receivables and securities.
We typically retain the servicing rights and may retain
other beneficial interests from these sales. Through these
securitizations, which are structured without recourse to
us and with no restrictions on the retained interests, we may
be exposed to a liability under standard representations and
warranties we make to purchasers and issuers. The amount
recorded for this liability was not material to our consolidated
financial statements at year-end 2005 or 2004. We do not
have significant credit risks from the retained interests.
We recognized gains of $326 million from sales of
financial assets in securitizations in 2005 and $199 million
in 2004. Additionally, we had the following cash flows with
our securitization trusts.
Key economic assumptions and the sensitivity of the
current fair value to immediate adverse changes in those
assumptions at December 31, 2005, for mortgage servicing
rights, both purchased and retained, and other retained
interests related to residential mortgage loan securitizations
are presented in the following table.
($ in millions) Mortgage Other retained
servicing rights interests
Fair value of retained interests $12,687 $ 223
Expected weighted-average life (in years) 5.8 6.4
Prepayment speed assumption (annual CPR) 11.6% 8.6%
Decrease in fair value from
10% adverse change $ 441 $ 7
Decrease in fair value from
25% adverse change 1,032 17
Discount rate assumption 10.5% 10.5%
Decrease in fair value from
100 basis point adverse change $ 476 $ 7
Decrease in fair value from
200 basis point adverse change 916 14
Mortgage Other retained
servicing rights interests
2005 2004 2005 2004
Prepayment speed
(annual CPR (1)) (2) 16.9% 16.8% 12.7% 14.9%
Life (in years) (2) 5.6 4.9 7.0 3.9
Discount rate (2) 10.1% 9.9% 10.2% 10.3%
(1) Constant prepayment rate.
(2) Represents weighted averages for all retained interests resulting from
securitizations completed in 2005 and 2004.
Retained interest – AAA
mortgage-backed securities
2005 2004
Prepayment speed (annual CPR) 26.8% 34.8%
Life (in years) 2.4 2.2
Discount spread to LIBOR curve .22% .32%
We also retained some AAA-rated floating-rate mortgage-
backed securities. The fair value at the date of securitization
was determined using quoted market prices. The implied
CPR, life, and discount spread to the London Interbank
Offered Rate (LIBOR) curve at the date of securitization
is presented in the following table.