Wells Fargo 2015 Annual Report Download - page 192

Note 8: Securitizations and Variable Interest Entities (continued)
In addition to residential mortgage servicing rights (MSRs)
included in the previous table, we have a small portfolio of
commercial MSRs with a fair value of $1.7 billion and
$1.6 billion at December 31, 2015 and 2014, respectively. The
nature of our commercial MSRs, which are carried at LOCOM, is
different from our residential MSRs. Prepayment activity on
serviced loans does not significantly impact the value of
commercial MSRs because, unlike residential mortgages,
commercial mortgages experience significantly lower
prepayments due to certain contractual restrictions, impacting
the borrower’s ability to prepay the mortgage. Additionally, for
our commercial MSR portfolio, we are typically master/primary
servicer, but not the special servicer, who is separately
responsible for the servicing and workout of delinquent and
foreclosed loans. It is the special servicer, similar to our role as
servicer of residential mortgage loans, who is affected by higher
servicing and foreclosure costs due to an increase in delinquent
and foreclosed loans. Accordingly, prepayment speeds and costs
to service are not key assumptions for commercial MSRs as they
do not significantly impact the valuation. The primary economic
driver impacting the fair value of our commercial MSRs is
forward interest rates, which are derived from market
observable yield curves used to price capital markets
instruments. Market interest rates most significantly affect
interest earned on custodial deposit balances. The sensitivity of
the current fair value to an immediate adverse 25% change in the
assumption about interest earned on deposit balances at
December 31, 2015, and 2014, results in a decrease in fair value
of $150 million and $185 million, respectively. See Note 9
(Mortgage Banking Activities) for further information on our
commercial MSRs.
We also have a loan to an unconsolidated third party VIE
that we extended in fourth quarter 2014 in conjunction with our
sale of government guaranteed student loans. The loan is carried
at amortized cost and approximates fair value at December 31,
2015 and 2014. The carrying amount of the loan at December 31,
2015 and 2014, was $4.9 billion and $6.5 billion, respectively.
The estimated fair value of the loan is considered a Level 3
measurement that is determined using discounted cash flows
Table 8.6: Off-Balance Sheet Loans Sold or Securitized
that are based on changes in the discount rate due to changes in
the risk premium component (credit spreads). The primary
economic assumption impacting the fair value of our loan is the
discount rate. Changes in the credit loss assumption are not
expected to affect the estimated fair value of the loan due to the
government guarantee of the underlying collateral. The
sensitivity of the current fair value to an immediate adverse
increase of 200 basis points in the risk premium component of
the discount rate assumption is a decrease in fair value of
$82 million and $130 million at December 31, 2015 and 2014,
respectively. For more information on the student loan sale, see
the discussion on Asset-Based Finance Structures earlier in this
Note.
The sensitivities in the preceding paragraphs and table are
hypothetical and caution should be exercised when relying on
this data. Changes in value based on variations in assumptions
generally cannot be extrapolated because the relationship of the
change in the assumption to the change in value may not be
linear. Also, the effect of a variation in a particular assumption
on the value of the other interests held is calculated
independently without changing any other assumptions. In
reality, changes in one factor may result in changes in others (for
example, changes in prepayment speed estimates could result in
changes in the credit losses), which might magnify or counteract
the sensitivities.
Off-Balance Sheet Loans
Table 8.6 presents information about the principal balances of
off-balance sheet loans that were sold or securitized, including
residential mortgage loans sold to FNMA, FHLMC, GNMA and
other investors, for which we have some form of continuing
involvement (primarily servicer). Delinquent loans include loans
90 days or more past due and loans in bankruptcy, regardless of
delinquency status. For loans sold or securitized where servicing
is our only form of continuing involvement, we would only
experience a loss if we were required to repurchase a delinquent
loan or foreclosed asset due to a breach in representations and
warranties associated with our loan sale or servicing contracts.
Net charge-offs
Delinquent loans and
Total loans foreclosed assets (1) Year ended
December 31, December 31, December 31,
(in millions) 2015 2014 2015 2014 2015 2014
Commercial:
Real estate mortgage $ 110,815 114,081 6,670 7,949 383 621
Total commercial 110,815 114,081 6,670 7,949 383
Consumer:
Real estate 1-4 family first mortgage 1,235,662 1,322,136 20,904 28,639 814 1,209
Real estate 1-4 family junior lien mortgage — 1 — — — —
Other revolving credit and installment — 1,599 — 75 —
Total consumer 1,235,662 1,323,736 20,904 28,714 814 1,210
Total off-balance sheet sold or securitized loans (2) $ 1,346,477 1,437,817 27,574 36,663 1,197 1,831
(1) Includes $5.0 billion and $3.3 billion of commercial foreclosed assets and $2.2 billion and $2.7 billion of consumer foreclosed assets at December 31, 2015 and 2014,
respectively.
(2) At December 31, 2015 and 2014, the table includes total loans of $1.2 trillion and $1.3 trillion, delinquent loans of $12.1 billion and $16.5 billion, and foreclosed assets of
$1.7 billion and $2.4 billion, respectively, for FNMA, FHLMC and GNMA. Net charge-offs exclude loans sold to FNMA, FHLMC and GNMA as we do not service or manage the
underlying real estate upon foreclosure and, as such, do not have access to net charge-off information.
Wells Fargo & Company
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