Wells Fargo 2006 Annual Report Download - page 105

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103
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 2006 and 2005, we
used the following assumptions to determine the fair value
of mortgage servicing rights and other interests held at the
date of securitization.
The sensitivities in the previous table are hypothetical
and should be relied on with caution. Changes in fair value
based on a 10% variation in assumptions generally cannot
be extrapolated because the relationship of the change in
the assumption to the change in fair value may not be linear.
Also, in the previous table, the effect of a variation in a
particular assumption on the fair value of the other interests
held is calculated independently without changing any other
assumption. In reality, changes in one factor may result in
changes in another (for example, changes in prepayment
speed estimates could result in changes in the discount rates),
which might magnify or counteract the sensitivities.
(in millions) Year ended December 31,
2006 2005
Mortgage Other Mortgage Other
loans financial loans financial
assets assets
Sales proceeds from
securitizations $50,767 $103 $40,982 $225
Servicing fees 229 — 154 —
Cash flows on other
interests held 259 3 560 6
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 mortgages
and auto receivables. We typically retain the servicing rights
from these sales and may continue to hold other interests.
Through these securitizations, which are structured without
recourse to us and with no restrictions on the other interests
held, we may be exposed to a liability under standard repre-
sentations 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 2006 or
2005. We do not have significant credit risks from the other
interests held.
We recognized gains of $399 million from sales of
financial assets in securitizations in 2006 and $326 million
in 2005. Additionally, we had the following cash flows with
our securitization trusts. Key economic assumptions and the sensitivity of the
current fair value to immediate adverse changes in those
assumptions at December 31, 2006, for mortgage servicing
rights, both purchased and retained, and other interests
held related to residential mortgage loan securitizations
are presented in the following table.
($ in millions) Mortgage Other
servicing rights interests held
Fair value of interests held $18,047 $367
Expected weighted-average life (in years) 5.6 6.3
Prepayment speed assumption (annual CPR) 12.4% 10.4%
Decrease in fair value from
10% adverse change $ 616 $ 14
Decrease in fair value from
25% adverse change 1,439 33
Discount rate assumption 10.8% 11.3%
Decrease in fair value from
100 basis point adverse change $ 651 $ 13
Decrease in fair value from
200 basis point adverse change 1,253 24
Mortgage Other
servicing rights interests held
2006 2005 2006 2005
Prepayment speed
(annual CPR (1)) (2) 15.7% 16.9% 13.9% 12.7%
Life (in years) (2) 5.8 5.6 7.0 7.0
Discount rate (2) 10.5% 10.1% 10.0% 10.2%
(1) Constant prepayment rate.
(2) Represents weighted averages for all other interests held resulting from
securitizations completed in 2006 and 2005.
Other interests held – AAA
mortgage-backed securities
2005
Prepayment speed (annual CPR) 26.8%
Life (in years) 2.4
Discount spread to LIBOR curve 0.22%
At December 31, 2005, we also retained some AAA-rated
floating-rate mortgage-backed securities, which were sold
in 2006. 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.