Wells Fargo 2007 Annual Report Download - page 83

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strategy. These securities are accounted for under the cost or
equity method and are included in other assets. We reduce
the asset value when we consider declines in value to be
other than temporary. We recognize the estimated loss as a
loss from equity investments in noninterest income.
Mortgages Held for Sale
Mortgages held for sale (MHFS) include commercial and
residential mortgages originated for sale and securitization in
the secondary market, which is our principal market, or for
sale as whole loans. Effective January 1, 2007, we elected to
measure new prime residential MHFS at fair value.
Nonprime residential and commercial MHFS continue to
be held at the lower of cost or market value. For these loans,
gains and losses on loan sales (sales proceeds minus carrying
value) are recorded in noninterest income. Direct loan origi-
nation costs and fees are deferred at origination of the loan.
The deferred costs and fees are recognized in mortgage bank-
ing noninterest income upon sale of the loan.
At origination, our lines of business are authorized to
originate held for investment loans that meet or exceed
established loan product profitability criteria, including
minimum positive net interest margin spreads in excess of
funding costs. When a determination is made at the time of
commitment to originate loans as held for investment, it
is our intent to hold these loans to maturity or for the “fore-
seeable future,” subject to periodic review under our corpo-
rate asset/liability management process. In determining the
“foreseeable future” for these loans, management considers
1) the current economic environment and market conditions,
2) our business strategy and current business plans, 3) the
nature and type of the loan receivable, including its expected
life, and 4) our current financial condition and liquidity
demands. Consistent with our core banking business of man-
aging the spread between the yield on our assets and the cost
of our funds, loans are periodically reevaluated to determine
if our minimum net interest margin spreads continue to meet
our profitability objectives. If subsequent changes in interest
rates significantly impact the ongoing profitability of certain
loan products, we may subsequently change our intent to
hold these loans and we would take actions to sell such loans
in response to the Corporate ALCO directives to reposition
our balance sheet because of the changes in interest rates.
Such Corporate ALCO directives identify both the type
of loans (for example 3/1, 5/1, 10/1 and relationship
adjustable-rate mortgages (ARMs), as well as specific fixed-
rate loans) to be sold and the weighted-average coupon rate
of such loans no longer meeting our ongoing investment
criteria. Upon the issuance of such directives, we immediately
transfer these loans to the MHFS portfolio at the lower of
cost or market value.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market
value. Gains and losses on loan sales (sales proceeds minus
carrying value) are recorded in noninterest income. Direct
loan origination costs and fees are deferred at origination of
the loan. These deferred costs and fees are recognized in
noninterest income upon sale of the loan.
Loans
Loans are reported at their outstanding principal balances
net of any unearned income, charge-offs, unamortized
deferred fees and costs on originated loans and premiums or
discounts on purchased loans, except for certain purchased
loans, which are recorded at fair value on their purchase
date. Unearned income, deferred fees and costs, and dis-
counts and premiums are amortized to income over the con-
tractual life of the loan using the interest method.
We offer a portfolio product known as relationship
ARMs that provides interest rate reductions to reward eligi-
ble banking customers who have an existing relationship or
establish a new relationship with Wells Fargo. Accordingly,
this product offering is generally underwritten to certain
Company guidelines rather than secondary market standards
and is typically originated for investment. At December 31,
2007 and 2006, we had $15.4 billion and $3.4 billion,
respectively, of relationship ARMs in loans held for invest-
ment and $2 million and $163 million, respectively, in mort-
gages held for sale. Originations, net of collections and pro-
ceeds from the sale of these loans are reflected as investing
cash flows consistent with their original classification.
Lease financing assets include aggregate lease rentals, net
of related unearned income, which includes deferred invest-
ment tax credits, and related nonrecourse debt. Leasing
income is recognized as a constant percentage of outstanding
lease financing balances over the lease terms.
Loan commitment fees are generally deferred and amor-
tized into noninterest income on a straight-line basis over the
commitment period.
From time to time, we pledge loans, primarily 1-4 family
mortgage loans, to secure borrowings from the Federal
Home Loan Bank.
NONACCRUAL LOANS We generally place loans on nonaccrual
status when:
• the full and timely collection of interest or principal
becomes uncertain;
• they are 90 days (120 days with respect to real estate 1-4
family first and junior lien mortgages and auto loans)
past due for interest or principal (unless both well-secured
and in the process of collection); or
• part of the principal balance has been charged off.
Generally, consumer loans not secured by real estate or
autos are placed on nonaccrual status only when part of the
principal has been charged off. These loans are charged off or
charged down to the net realizable value of the collateral when
deemed uncollectible, due to bankruptcy or other factors, or
when they reach a defined number of days past due based on
loan product, industry practice, country, terms and other factors.
When we place a loan on nonaccrual status, we reverse
the accrued and unpaid interest receivable against interest
income and account for the loan on the cash or cost recovery
method, until it qualifies for return to accrual status. Generally,
we return a loan to accrual status when (a) all delinquent
interest and principal becomes current under the terms of the