Dominion Power 2001 Annual Report Download - page 65

Activity for the retained interests from securitizations of
mortgage loans, including interest-only strips and servicing
rights, and the CLO and CDO retained interests is summarized
as follows:
Interest-Only Servicing
Strips — Rights — Retained Retained
Mortgage Mortgage Interest — Interest —
(millions) Loans(1) Loans CLO CDO
Balance at January 1, 1999 $ 282 $ 35 — $24
Retained from securitization 169 16 — 34
Amortization (7) (12) ——
Cash received (79) ———
Fair value adjustment (18) ———
Balance at December 31, 1999 347 39 — 58
Retained from securitization 99 18 $ 76 30
Amortization (16) (7) ——
Cash received (51) —— (4)
Gain on trading securities 25 ———
Fair value adjustment (102) (5) — (1)
Balance at December 31, 2000 302 45 76 83
Retained from securitization 33 — 196 —
Amortization (9) ———
Cash received (55) —— (6)
Gain on trading securities 19 ———
Servicing rights sold(2) — (45) ——
Fair value adjustment (21) — (67) (14)
Balance at December 31, 2001 $ 269 $ — $205 $ 63
(1) Includes prepayment penalties.
(2) Dominion sold all of its servicing rights as part of its sale of Saxon Mortgage in 2001.
Presented below are the fair values of Dominion’s retained
interests and related key economic assumptions as of December
31, 2001 and the sensitivity of the retained interests’ fair value
to adverse changes of 10 percent and 20 percent in those
assumptions:
Retained
Interest — Retained Retained
Mortgage Interest — Interest —
(millions, except percentages) Loans CLO CDO
Carrying amount/fair value $261 $205 $63
Weighted-average life (in years) 2.69 2.2 3.8
Prepayment speed assumption
(annual rate) (1) N/A N/A
Impact on fair value of 10%
adverse change $ (15) N/A N/A
Impact on fair value of 20%
adverse change $ (30) N/A N/A
Expected credit losses (annual rate) 3.32% 4%(2) 2 %
(3)
Impact on fair value of 10%
adverse change $ (8) $ (7) $ (1)
Impact on fair value of 20%
adverse change $ (15) $ (11) $ (3)
Residual cash flows discount
rate (annual) 17% 10% 16.9%
Impact on fair value of 10%
adverse change $ (6) $ (12) $ (2)
Impact on fair value of 20%
adverse change $ (15) $ (17) $ (4)
Interest rates on variable and
adjustable contracts (4) N/A N/A
Impact on fair value of 10%
adverse change — N/A N/A
Impact on fair value of 20%
adverse change $ (3) N/A N/A
(1) Fixed rate loans ramp up to 25 CPR over 16 months. Adjustable rate loans ramp up to
65 CPR over 16 months, ramping down to 40 CPR over 12 months. Second liens ramp
up to 35 CPR over 16 months, ramping down to 22 CPR over 26 months. Two-year
hybrid loans ramp up to 32 CPR over 14 months; ramping up to 65 CPR in month 25;
ramping to 31 CPR over 7 months. Three-year hybrid loans ramp up to 32 CPR over 14
months; ramping up to 60 CPR in month 37; ramping down to 31 CPR over 7 months.
(2) Defaults occur at the beginning of each period. They are applied on constant percentage
to the period’s beginning collateral balance.
(3) Assets rated Caa1 and lower are defaulted using a CDR vector based upon Moody’s
Cumulative Default Rates for Caa1-C securities. A 2 percent per annum CDR is applied
to remaining assets with ongoing recoveries of 40 percent and 80 percent on bonds and
loans, respectively.
(4) Based on the full forward 1-month LIBOR, 6-month LIBOR or 1-year CMT through
January 1, 2005 based on the variable component of the variable rate contracts.
These sensitivities are hypothetical. Changes in fair value
based on a 10 percent variation in assumptions generally cannot
be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also,
the effect of a variation in a particular assumption on the fair
value of the retained interests was calculated without changing
any other assumption. In reality, changes in one factor may
result in changes in another factor which might magnify or
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