Wells Fargo 2011 Annual Report Download - page 142

Note 5: Securities Available for Sale (continued)
For asset-backed securities (e.g., residential MBS), we estimate
expected future cash flows of the security by estimating the
expected future cash flows of the underlying collateral and
applying those collateral cash flows, together with any credit
enhancements such as subordinated interests owned by third
parties, to the security. The expected future cash flows of the
underlying collateral are determined using the remaining
contractual cash flows adjusted for future expected credit losses
(which consider current delinquencies and nonperforming assets
(NPAs), future expected default rates and collateral value by
vintage and geographic region) and prepayments. The expected
cash flows of the security are then discounted at the security’s
current effective interest rate to arrive at a present value
amount. Total credit impairment losses on residential MBS that
we do not intend to sell are shown in the table below. The table
also presents a summary of the significant inputs considered in
determining the measurement of the credit loss component
recognized in earnings for residential MBS.
Year ended December 31,
($ in millions)
2011
2010
2009
Credit impairment losses on residential MBS
Investment grade
$
5
5
24
Non-investment grade
247
170
567
Total credit impairment losses on residential MBS
$
252
175
591
Significant inputs (non-agency – non-investment grade MBS)
Expected remaining life of loan losses (1):
Range (2)
0-48
%
1-43
0-58
Credit impairment distribution (3):
0 - 10% range
42
52
56
10 - 20% range
18
29
27
20 - 30% range
28
17
12
Greater than 30%
12
2
5
Weighted average (4)
12
9
11
Current subordination levels (5):
Range (2)
0-25
0-25
0-44
Weighted average (4)
4
7
8
Prepayment speed (annual CPR (6)):
Range (2)
3-19
2-27
5-25
Weighted average (4)
11
14
11
(1) Represents future expected credit losses on underlying pool of loans expressed as a percentage of total current outstanding loan balance.
(2) Represents the range of inputs/assumptions based upon the individual securities within each category.
(3) Represents distribution of credit impairment losses recognized in earnings categorized based on range of expected remaining life of loan losses. For example 42% of credit
impairment losses recognized in earnings for the year ended December 31, 2011, had expected remaining life of loan loss assumptions of 0 to 10%.
(4) Calculated by weighting the relevant input/assumption for each individual security by current outstanding amortized cost basis of the security.
(5) Represents current level of credit protection (subordination) for the securities, expressed as a percentage of total current underlying loan balance.
(6) Constant prepayment rate.
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