Wells Fargo 2012 Annual Report Download - page 178

Note 8: Securitizations and Variable Interest Entities (continued)
The following table provides key economic assumptions and
the sensitivity of the current fair value of residential mortgage
servicing rights and other retained interests to immediate
adverse changes in those assumptions. “Other interests held”
relate predominantly to residential and commercial mortgage
loan securitizations. Residential mortgage-backed securities
retained in securitizations issued through GSEs, such as FNMA,
FHLMC and GNMA, are excluded from the table because these
securities have a remote risk of credit loss due to the GSE
guarantee. These securities also have economic characteristics
similar to GSE mortgage-backed securities that we purchase,
which are not included in the table. Subordinated interests
include only those bonds whose credit rating was below AAA by
a major rating agency at issuance. Senior interests include only
those bonds whose credit rating was AAA by a major rating
agency at issuance. The information presented excludes trading
positions held in inventory.
Other interests held
Residential
mortgage Interest- Consumer Commercial (2)
servicing only Subordinated Senior Subordinated Senior
($ in millions, except cost to service amounts) rights (1) strips bonds bonds bonds bonds
Fair value of interests held at December 31, 2012 $ 11,538 187 40 - 249 982
Expected weighted-average life (in years) 4.8 4.1 5.9 - 4.7 5.3
Key economic assumptions:
Prepayment speed assumption (3) 15.7 % 10.6 6.8 -
Decrease in fair value from:
10% adverse change $ 869 5 - -
25% adverse change 2,038 12 - -
Discount rate assumption 7.4 % 16.9 8.9 - 3.5 2.2
Decrease in fair value from:
100 basis point increase $ 562 4 2 - 12 43
200 basis point increase 1,073 8 4 - 21 84
Cost to service assumption ($ per loan) 219
Decrease in fair value from:
10% adverse change 615
25% adverse change 1,537
Credit loss assumption 0.4 % - 10.0 -
Decrease in fair value from:
10% higher losses $ - - 12 -
25% higher losses - - 19 -
Fair value of interests held at December 31, 2011 $ 12,918 230 45 321 240 852
Expected weighted-average life (in years) 5.1 4.6 6.1 5.6 5.3 4.4
Key economic assumptions:
Prepayment speed assumption (3) 14.8 % 10.7 6.9 13.9
Decrease in fair value from:
10% adverse change $ 895 6 - 2
25% adverse change 2,105 15 1 4
Discount rate assumption 7.1 % 15.6 11.9 7.1 3.8 2.4
Decrease in fair value from:
100 basis point increase $ 566 6 2 12 9 31
200 basis point increase 1,081 12 4 24 18 59
Cost to service assumption ($ per loan) 218
Decrease in fair value from:
10% adverse change 582
25% adverse change 1,457
Credit loss assumption 0.5 % 4.5 10.7 -
Decrease in fair value from:
10% higher losses $ - 1 8 -
25% higher losses - 2 18 -
(1) December 31, 2011, has been revised to report only the sensitivities for residential mortgage servicing rights. See narrative following this table for a discussion of
commercial mortgage servicing rights.
(2) “Other interests held” has been expanded to include retained interests from commercial securitizations. Prepayment speed assumptions do not significantly impact the value
of commercial mortgage securitization bonds as the underlying commercial mortgage loans experience significantly lower prepayments due to certain contractual
restrictions, impacting the borrower’s ability to prepay the mortgage.
(3) The prepayment speed assumption for residential mortgage servicing rights includes a blend of prepayment speeds and default rates. Prepayment speed assumptions are
influenced by mortgage interest rate inputs as well as our estimation of drivers of borrower behavior.
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