Goldman Sachs 2009 Annual Report Download - page 123

Goldman Sachs 2009 Annual Report
121
Notes to Consolidated Financial Statements
As of December2009 and November2008, the  rm held
mortgage servicing rights with a fair value of $88million and
$147million, respectively. These servicing assets represent
the  rm’s right to receive a future stream of cash  ows, such
as servicing fees, in excess of the  rm’s obligation to service
residential mortgages. The fair value of mortgage servicing
rights will  uctuate in response to changes in certain economic
variables, such as discount rates and loan prepayment rates.
The  rm estimates the fair value of mortgage servicing rights
by using valuation models that incorporate these variables
in quantifying anticipated cash  ows related to servicing
activities. Mortgage servicing rights are included in “Trading
assets, at fair value” in the consolidated statements of  nancial
condition and are classi ed within level3 of the fair value
hierarchy. The following table sets forth changes in the  rm’s
mortgage servicing rights, as well as servicing fees earned:
Year Ended
December November
(inmillions) 2009 2008
Balance, beginning of period $153 $ 93
Purchases – 272
(3)
Servicing assets that resulted from
transfers of  nancial assets 1 3
Changes in fair value due to changes
in valuation inputs and assumptions (66) (221)
Balance, end of period
(1) $ 88 $ 147
Contractually speci ed servicing fees
(2) $320 $ 315
(1) As of December2009 and November2008, the fair value was estimated
using a weighted average discount rate of approximately 16% and 16%,
respectively, and a weighted average prepayment rate of approximately
20% and 27%, respectively.
(2) Contractually speci ed servicing fees for the one month ended
December2008 were $25million.
(3) Primarily related to the acquisition of Litton Loan Servicing LP.
Variable Interest Entities
The  rm, in the ordinary course of business, retains interests
in VIEs in connection with its securitization activities. The
 rm also purchases and sells variable interests in VIEs, which
primarily issue mortgage-backed and other asset-backed
securities, CDOs and CLOs, in connection with its market-
making activities and makes investments in and loans to VIEs
that hold performing and nonperforming debt, equity, real
estate, power-related and other assets. In addition, the  rm
utilizes VIEs to provide investors with principal-protected
notes, credit-linked notes and asset-repackaged notes designed
to meet their objectives. VIEs generally purchase assets by
issuing debt and equity instruments.
The  rm’s signi cant variable interests in VIEs include senior
and subordinated debt interests in mortgage-backed and
asset-backed securitization vehicles, CDOs and CLOs; loan
commitments; limited and general partnership interests;
preferred and common stock; interest rate, foreign currency,
equity, commodity and credit derivatives; and guarantees.
The  rm’s exposure to the obligations of VIEs is generally
limited to its interests in these entities. In the tables set forth
below, the maximum exposure to loss for purchased and
retained interests and loans and investments is the carrying
value of these interests. In certain instances, the  rm provides
guarantees, including derivative guarantees, to VIEs or
holders of variable interests in VIEs. For these contracts,
maximum exposure to loss set forth in the tables below is the
notional amount of such guarantees, which does not represent
anticipated losses and also has not been reduced by unrealized
losses already recorded by the  rm in connection with these
guarantees. As a result, the maximum exposure to loss
exceeds the  rm’s liabilities related to VIEs.