Quarterly report pursuant to Section 13 or 15(d)

Securitizations and Other Variable Interest Entities

v3.8.0.1
Securitizations and Other Variable Interest Entities
9 Months Ended
Sep. 30, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Securitizations and Other Variable Interest Entities
Securitizations and Other Variable Interest Entities
The Corporation utilizes VIEs in the ordinary course of business to support its own and its customers’ financing and investing needs. For more information on the Corporation’s use of VIEs, see Note 1 – Summary of Significant Accounting Principles and Note 6 – Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.
The tables in this Note present the assets and liabilities of consolidated and unconsolidated VIEs at September 30, 2017 and December 31, 2016, in situations where the Corporation has continuing involvement with transferred assets or if the Corporation otherwise has a variable interest in the VIE. The tables also present the Corporation’s maximum loss exposure at September 30, 2017 and December 31, 2016 resulting from its involvement with consolidated VIEs and unconsolidated VIEs in which the Corporation holds a variable interest. The Corporation’s maximum loss exposure is based on the unlikely event that all of the assets in the VIEs become worthless and incorporates not only potential losses associated with assets recorded on the Consolidated Balance Sheet but also potential losses associated with off-balance sheet commitments, such as unfunded liquidity commitments and other contractual arrangements. The Corporation’s maximum loss exposure does not include losses previously recognized through write-downs of assets.
The Corporation invests in ABS issued by third-party VIEs with which it has no other form of involvement and enters into certain commercial lending arrangements that may also incorporate the use of VIEs, for example to hold collateral. These securities and loans are included in Note 3 – Securities or Note 4 – Outstanding Loans and Leases. In addition, the Corporation uses VIEs such as trust preferred securities trusts in connection with its funding activities. For additional information, see Note 11 – Long-term Debt to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K. The Corporation uses VIEs, such as common trust funds managed within Global Wealth & Investment Management (GWIM), to provide investment opportunities for clients. These VIEs, which are generally not consolidated by the Corporation, as applicable, are not included in the tables herein.
Except as described below, the Corporation did not provide financial support to consolidated or unconsolidated VIEs during the nine months ended September 30, 2017 or the year ended December 31, 2016 that it was not previously contractually required to provide, nor does it intend to do so.
First-lien Mortgage Securitizations
First-lien Mortgages
As part of its mortgage banking activities, the Corporation securitizes a portion of the first-lien residential mortgage loans it originates or purchases from third parties. Except as described below and in Note 7 – Representations and Warranties Obligations and Corporate Guarantees, the Corporation does not provide guarantees or recourse to the securitization trusts other than standard representations and warranties.
The table below summarizes select information related to first-lien mortgage securitizations for the three and nine months ended September 30, 2017 and 2016.
 
 
 
 
 
 
 
 
 
 
 
 
First-lien Mortgage Securitizations
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage - Agency
 
Commercial Mortgage
 
Three Months Ended September 30
 
Nine Months Ended September 30
 
Three Months Ended September 30
 
Nine Months Ended September 30
(Dollars in millions)
2017
2016
 
2017
2016
 
2017
2016
 
2017
2016
Cash proceeds from new securitizations (1)
$
3,833

$
7,131

 
$
11,791

$
18,580

 
$
1,225

$
1,052

 
$
2,931

$
3,031

Gains on securitizations (2)
40

89

 
140

322

 
14

27

 
67

18

Repurchases from securitization trusts (3)
609

684

 
2,083

2,058

 


 


(1) 
The Corporation transfers residential mortgage loans to securitizations sponsored by the GSEs or Government National Mortgage Association (GNMA) in the normal course of business and receives RMBS in exchange which may then be sold into the market to third-party investors for cash proceeds.
(2) 
A majority of the first-lien residential and commercial mortgage loans securitized are initially classified as LHFS and accounted for under the fair value option. Gains recognized on these LHFS prior to securitization, which totaled $63 million and $195 million, net of hedges, during the three and nine months ended September 30, 2017 compared to $149 million and $349 million for the same periods in 2016, are not included in the table above.
(3) 
The Corporation may have the option to repurchase delinquent loans out of securitization trusts, which reduces the amount of servicing advances it is required to make. The Corporation may also repurchase loans from securitization trusts to perform modifications. Repurchased loans include FHA-insured mortgages collateralizing GNMA securities.
In addition to cash proceeds as reported in the table above, the Corporation received securities with an initial fair value of $770 million and $1.3 billion in connection with first-lien mortgage securitizations for the three and nine months ended September 30, 2017 compared to $1.2 billion and $3.1 billion for the same periods in 2016. The receipt of these securities represents non-cash operating and investing activities and, accordingly, is not reflected in the Consolidated Statement of Cash Flows. Substantially all of these securities were initially classified as Level 2 assets within the fair value hierarchy. During the three and nine months ended September 30, 2017 and 2016, there were no changes to the initial classification.
The Corporation recognizes consumer MSRs from the sale or securitization of consumer real estate loans. The unpaid principal balance of loans serviced for investors, including residential mortgage and home equity loans, totaled $289.3 billion and $355.0 billion at September 30, 2017 and 2016. Servicing fee and ancillary fee income on serviced loans was $213 million and $691 million during the three and nine months ended September 30, 2017 compared to $286 million and $887 million for the same periods in 2016. Servicing advances on serviced loans, including loans serviced for others and loans held for investment were $4.7 billion and $6.2 billion at September 30, 2017 and December 31, 2016. For more information on MSRs, see Note 14 – Fair Value Measurements.
During the three and nine months ended September 30, 2016, the Corporation deconsolidated agency residential mortgage securitization vehicles with total assets of $326 million and $3.1 billion following the sale of retained interests to third parties, after which the Corporation no longer had the unilateral ability to liquidate the vehicles. Gains on sale of $11 million and $125 million related to these deconsolidations were recorded in other income in the Consolidated Statement of Income. No deconsolidations of agency residential mortgage securitization vehicles occurred during the three and nine months ended September 30, 2017.
The following table summarizes select information related to first-lien mortgage securitization trusts in which the Corporation held a variable interest at September 30, 2017 and December 31, 2016.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First-lien Mortgage VIEs
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage
 
 

 

 
 

 

 
Non-agency
 
 

 

 
Agency
 
Prime
 
Subprime
 
Alt-A
 
Commercial Mortgage
(Dollars in millions)
September 30
2017
December 31
2016
 
September 30
2017
December 31
2016
 
September 30
2017
December 31
2016
 
September 30
2017
December 31
2016
 
September 30
2017
December 31
2016
Unconsolidated VIEs
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Maximum loss exposure (1)
$
19,585

$
22,661

 
$
623

$
757

 
$
2,677

$
2,750

 
$
464

$
560

 
$
420

$
344

On-balance sheet assets
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Senior securities
    held (2):
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Trading account assets
$
300

$
1,399

 
$
18

$
20

 
$
51

$
112

 
$
35

$
118

 
$
58

$
51

Debt securities carried at FV
15,827

17,620

 
359

441

 
2,226

2,235

 
318

305

 


Held-to-maturity securities
3,447

3,630

 


 


 


 
160

64

Subordinate securities held (2):
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Trading account assets


 
1

1

 
22

23

 
1

1

 
11

14

Debt securities carried at FV


 
6

8

 
2

2

 
20

23

 
48

54

Held-to-maturity securities


 


 


 


 

13

Residual interests held


 


 


 


 
25

25

All other assets (3)
11

12

 
23

28

 


 
90

113

 


Total retained positions
$
19,585

$
22,661

 
$
407

$
498

 
$
2,301

$
2,372

 
$
464

$
560

 
$
302

$
221

Principal balance outstanding (4)
$
242,353

$
265,332

 
$
11,152

$
16,280

 
$
10,993

$
19,373

 
$
29,550

$
35,788

 
$
24,945

$
23,826

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Maximum loss exposure (1)
$
15,040

$
18,084

 
$
337

$

 
$

$

 
$

$
25

 
$

$

On-balance sheet assets
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Trading account
assets
$
37

$
434

 
$
330

$

 
$

$

 
$

$
99

 
$

$

Loans and leases
14,762

17,223

 


 


 


 


All other assets
241

427

 
7


 


 


 


Total assets
$
15,040

$
18,084

 
$
337

$

 
$

$

 
$

$
99

 
$

$

On-balance sheet liabilities
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Long-term debt
$

$

 
$

$

 
$

$

 
$

$
74

 
$

$

All other liabilities
2

4

 


 


 


 


Total liabilities
$
2

$
4

 
$

$

 
$

$

 
$

$
74

 
$

$

(1) 
Maximum loss exposure includes obligations under loss-sharing reinsurance and other arrangements for non-agency residential mortgage and commercial mortgage securitizations, but excludes the reserve for representations and warranties obligations and corporate guarantees and also excludes servicing advances and other servicing rights and obligations. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees and Note 14 – Fair Value Measurements.
(2) 
As a holder of these securities, the Corporation receives scheduled principal and interest payments. During the three and nine months ended September 30, 2017, the Corporation recognized $0 and $16 million compared to $1 million and $5 million for the same periods in 2016 of credit-related impairment losses in earnings on those securities classified as AFS debt securities. During the three and nine months ended September 30, 2017 and 2016, the Corporation recognized no credit-related impairment losses in earnings on those securities classified as HTM.
(3) 
Not included in the table above are all other assets of $147 million and $189 million, representing the unpaid principal balance of mortgage loans eligible for repurchase from unconsolidated residential mortgage securitization vehicles, principally guaranteed by GNMA, and all other liabilities of $147 million and $189 million, representing the principal amount that would be payable to the securitization vehicles if the Corporation was to exercise the repurchase option, at September 30, 2017 and December 31, 2016.
(4) 
Principal balance outstanding includes loans where the Corporation was the transferor to securitization vehicles with which it has continuing involvement, which may include servicing the loans.
Other Asset-backed Securitizations
The table below summarizes select information related to home equity loan, credit card and other asset-backed VIEs in which the Corporation held a variable interest at September 30, 2017 and December 31, 2016.
 
 
 
 
 
 
 
 
 
 
 
 
Home Equity Loan, Credit Card and Other Asset-backed VIEs
 
 
 
 
 
Home Equity Loan (1)
 
Credit Card (2, 3)
 
Resecuritization Trusts
 
Municipal Bond Trusts
(Dollars in millions)
September 30
2017
December 31
2016
 
September 30
2017
December 31
2016
 
September 30
2017
December 31
2016
 
September 30
2017
December 31
2016
Unconsolidated VIEs
 

 

 
 
 
 
 

 

 
 

 

Maximum loss exposure
$
1,632

$
2,732

 
$

$

 
$
9,107

$
9,906

 
$
1,566

$
1,635

On-balance sheet assets
 

 

 
 
 
 
 

 

 
 

 

Senior securities held (4):
 

 

 
 
 
 
 

 

 
 

 

Trading account assets
$

$

 
$

$

 
$
1,246

$
902

 
$
9

$

Debt securities carried at fair value
39

46

 


 
1,891

2,338

 


Held-to-maturity securities


 


 
5,866

6,569

 


Subordinate securities held (4):
 

 

 
 
 
 
 

 

 
 

 

Trading account assets


 


 
30

27

 


Debt securities carried at fair value


 


 
74

70

 


Total retained positions
$
39

$
46

 
$

$

 
$
9,107

$
9,906

 
$
9

$

Total assets of VIEs (5)
$
2,598

$
4,274

 
$

$

 
$
21,822

$
22,155

 
$
2,250

$
2,406

 
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 

 

 
 
 
 
 

 

 
 

 

Maximum loss exposure
$
119

$
149

 
$
22,937

$
25,859

 
$
343

$
420

 
$
1,215

$
1,442

On-balance sheet assets
 

 

 
 
 
 
 

 

 
 

 

Trading account assets
$

$

 
$

$

 
$
864

$
1,428

 
$
1,214

$
1,454

Loans and leases
192

244

 
32,281

35,135

 


 


Allowance for loan and lease losses
(13
)
(16
)
 
(1,002
)
(1,007
)
 


 


All other assets
6

7

 
276

793

 


 
1


Total assets
$
185

$
235

 
$
31,555

$
34,921

 
$
864

$
1,428

 
$
1,215

$
1,454

On-balance sheet liabilities
 

 

 
 
 
 
 

 

 
 

 

Short-term borrowings
$

$

 
$

$

 
$

$

 
$
122

$
348

Long-term debt
82

108

 
8,598

9,049

 
521

1,008

 

12

All other liabilities


 
20

13

 


 


Total liabilities
$
82

$
108

 
$
8,618

$
9,062

 
$
521

$
1,008

 
$
122

$
360

(1) 
For unconsolidated home equity loan VIEs, the maximum loss exposure includes outstanding trust certificates issued by trusts in rapid amortization, net of recorded reserves. For both consolidated and unconsolidated home equity loan VIEs, the maximum loss exposure excludes the reserve for representations and warranties obligations and corporate guarantees. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees.
(2) 
At September 30, 2017 and December 31, 2016, loans and leases in the consolidated credit card trust included $15.3 billion and $17.6 billion of seller’s interest.
(3) 
At September 30, 2017 and December 31, 2016, all other assets in the consolidated credit card trust included restricted cash, certain short-term investments, and unbilled accrued interest and fees.
(4) 
The retained senior and subordinate securities were valued using quoted market prices or observable market inputs (Level 2 of the fair value hierarchy).
(5) 
Total assets include loans the Corporation transferred with which it has continuing involvement, which may include servicing the loan.
Home Equity Loans
The Corporation retains interests in home equity securitization trusts to which it transferred home equity loans. These retained interests include senior and subordinate securities and residual interests. In addition, the Corporation may be obligated to provide subordinate funding to the trusts during a rapid amortization event. This obligation is included in the maximum loss exposure in the table above. The charges that will ultimately be recorded as a result of the rapid amortization events depend on the undrawn available credit on the home equity lines, performance of the loans, the amount of subsequent draws and the timing of related cash flows.
Credit Card Securitizations
The Corporation securitizes originated and purchased credit card loans. The Corporation’s continuing involvement with the securitization trust includes servicing the receivables, retaining an undivided interest (seller’s interest) in the receivables, and holding certain retained interests including senior and subordinate securities, subordinate interests in accrued interest and fees on the securitized receivables, and cash reserve accounts.
For the nine months ended September 30, 2017, $3.1 billion of new senior debt securities were issued to third-party investors from the credit card securitization trust compared to $750 million for the same period in 2016.
At September 30, 2017 and December 31, 2016, the Corporation held subordinate securities issued by the credit card securitization trust with a notional principal amount of $7.4 billion and $7.5 billion. These securities serve as a form of credit enhancement to the senior debt securities and have a stated interest rate of zero percent. There were $500 million of these subordinate securities issued for the nine months ended September 30, 2017 compared to $121 million for the same period in 2016.
Resecuritization Trusts
The Corporation transfers securities, typically MBS, into resecuritization vehicles at the request of customers seeking securities with specific characteristics. Generally, there are no significant ongoing activities performed in a resecuritization trust and no single investor has the unilateral ability to liquidate the trust.
The Corporation resecuritized $5.0 billion and $20.1 billion of securities during the three and nine months ended September 30, 2017 compared to $5.6 billion and $20.3 billion for the same periods in 2016. Securities transferred into resecuritization vehicles during the three and nine months ended September 30, 2017 and 2016 were measured at fair value with changes in fair value recorded in trading account profits prior to the resecuritization and no gain or loss on sale was recorded. Resecuritization proceeds included securities with an initial fair value of $855 million and $2.7 billion during the three and nine months ended September 30, 2017 compared to $430 million and $2.6 billion for the same periods in 2016. All of the securities received as resecuritization proceeds were classified as trading securities and were categorized as Level 2 within the fair value hierarchy.
Municipal Bond Trusts
The Corporation administers municipal bond trusts that hold highly-rated, long-term, fixed-rate municipal bonds. The trusts obtain financing by issuing floating-rate trust certificates that reprice on a weekly or other short-term basis to third-party investors.
The Corporation’s liquidity commitments to unconsolidated municipal bond trusts, including those for which the Corporation was transferor, totaled $1.6 billion at both September 30, 2017 and December 31, 2016. The weighted-average remaining life of bonds held in the trusts at September 30, 2017 was 5.6 years. There were no material write-downs or downgrades of assets or issuers during the nine months ended September 30, 2017 and 2016.
Other Variable Interest Entities
The table below summarizes select information related to other VIEs in which the Corporation held a variable interest at September 30, 2017 and December 31, 2016.
 
 
 
 
 
 
 
 
 
 
 
 
Other VIEs
 
 
 
 
 
 
 
 
 
September 30, 2017
 
December 31, 2016
(Dollars in millions)
Consolidated
 
Unconsolidated
 
Total
 
Consolidated
 
Unconsolidated
 
Total
Maximum loss exposure
$
5,398

 
$
19,676

 
$
25,074

 
$
6,114

 
$
17,754

 
$
23,868

On-balance sheet assets
 

 
 

 
 

 
 

 
 

 
 

Trading account assets
$
2,697

 
$
303

 
$
3,000

 
$
2,358

 
$
233

 
$
2,591

Debt securities carried at fair value

 
197

 
197

 

 
122

 
122

Loans and leases
2,787

 
4,200

 
6,987

 
3,399

 
3,249

 
6,648

Allowance for loan and lease losses
(8
)
 
(33
)
 
(41
)
 
(9
)
 
(24
)
 
(33
)
Loans held-for-sale
66

 
843

 
909

 
188

 
464

 
652

All other assets
131

 
13,717

 
13,848

 
369

 
13,156

 
13,525

Total
$
5,673

 
$
19,227

 
$
24,900

 
$
6,305

 
$
17,200

 
$
23,505

On-balance sheet liabilities
 

 
 

 
 

 
 

 
 

 
 

Long-term debt (1)
$
256

 
$

 
$
256

 
$
395

 
$

 
$
395

All other liabilities
32

 
3,146

 
3,178

 
24

 
2,959

 
2,983

Total
$
288

 
$
3,146

 
$
3,434

 
$
419

 
$
2,959

 
$
3,378

Total assets of VIEs
$
5,673

 
$
69,817

 
$
75,490

 
$
6,305

 
$
62,269

 
$
68,574


(1) 
Includes $13 million and $229 million of long-term debt at September 30, 2017 and December 31, 2016 issued by other consolidated VIEs, which has recourse to the general credit of the Corporation.
Customer Vehicles
Customer vehicles include credit-linked, equity-linked and commodity-linked note vehicles, repackaging vehicles, and asset acquisition vehicles, which are typically created on behalf of customers who wish to obtain market or credit exposure to a specific company, index, commodity or financial instrument.
The Corporation’s maximum loss exposure to consolidated and unconsolidated customer vehicles totaled $2.4 billion and $2.9 billion at September 30, 2017 and December 31, 2016, including the notional amount of derivatives to which the Corporation is a counterparty, net of losses previously recorded, and the Corporation’s investment, if any, in securities issued by the vehicles. The Corporation also had liquidity commitments, including written put options and collateral value guarantees, with certain unconsolidated vehicles of $55 million and $323 million at September 30, 2017 and December 31, 2016, that are included in the table above.
Collateralized Debt Obligation Vehicles
The Corporation receives fees for structuring CDO vehicles, which hold diversified pools of fixed-income securities, typically corporate debt or ABS, which the CDO vehicles fund by issuing multiple tranches of debt and equity securities. CDOs are generally managed by third-party portfolio managers. The Corporation typically transfers assets to these CDOs, holds securities issued by the CDOs and may be a derivative counterparty to the CDOs. The Corporation’s maximum loss exposure to consolidated and unconsolidated CDOs totaled $428 million and $430 million at September 30, 2017 and December 31, 2016.
Investment Vehicles
The Corporation sponsors, invests in or provides financing, which may be in connection with the sale of assets, to a variety of investment vehicles that hold loans, real estate, debt securities or other financial instruments and are designed to provide the desired investment profile to investors or the Corporation. At September 30, 2017 and December 31, 2016, the Corporation’s consolidated investment vehicles had total assets of $683 million and $846 million. The Corporation also held investments in unconsolidated vehicles with total assets of $24.1 billion and $17.3 billion at September 30, 2017 and December 31, 2016. The Corporation’s maximum loss exposure associated with both consolidated and unconsolidated investment vehicles totaled $6.4 billion and $5.1 billion at September 30, 2017 and December 31, 2016 comprised primarily of on-balance sheet assets less non-recourse liabilities.
In prior periods, the Corporation transferred servicing advance receivables to independent third parties in connection with the sale of MSRs. Portions of the receivables were transferred into unconsolidated securitization trusts. The Corporation retained senior interests in such receivables with a maximum loss exposure and funding obligation of $90 million and $150 million, including a funded balance of $45 million and $75 million at September 30, 2017 and December 31, 2016, which were classified in other debt securities carried at fair value.
Leveraged Lease Trusts
The Corporation’s net investment in consolidated leveraged lease trusts totaled $2.3 billion and $2.6 billion at September 30, 2017 and December 31, 2016. The trusts hold long-lived equipment such as rail cars, power generation and distribution equipment, and commercial aircraft. The Corporation structures the trusts and holds a significant residual interest. The net investment represents the Corporation’s maximum loss exposure to the trusts in the unlikely event that the leveraged lease investments become worthless. Debt issued by the leveraged lease trusts is non-recourse to the Corporation.
Tax Credit Vehicles
The Corporation holds investments in unconsolidated limited partnerships and similar entities that construct, own and operate affordable housing, wind and solar projects. An unrelated third party is typically the general partner or managing member and has control over the significant activities of the vehicle. The Corporation earns a return primarily through the receipt of tax credits allocated to the projects. The maximum loss exposure included in the Other VIEs table was $13.4 billion and $12.6 billion at September 30, 2017 and December 31, 2016. The Corporation’s risk of loss is generally mitigated by policies requiring that the project qualify for the expected tax credits prior to making its investment.
The Corporation's investments in affordable housing partnerships, which are reported in other assets on the Consolidated Balance Sheet, totaled $7.6 billion and $7.4 billion, including unfunded commitments to provide capital contributions of $2.8 billion and $2.7 billion at September 30, 2017 and December 31, 2016. The unfunded commitments are expected to be paid over the next five years. The Corporation recognized tax credits and other tax benefits from investments in affordable housing partnerships of $293 million and $825 million, and reported pre-tax losses in other noninterest income of $209 million and $612 million for the three and nine months ended September 30, 2017. For the same periods in 2016, the Corporation recognized tax credits and other tax benefits of $337 million and $819 million, and pre-tax losses of $200 million and $596 million. Tax credits are recognized as part of the Corporation's annual effective tax rate used to determine tax expense in a given quarter. Accordingly, the portion of a year's expected tax benefits recognized in any given quarter may differ from 25 percent. The Corporation may from time to time be asked to invest additional amounts to support a troubled affordable housing project. Such additional investments have not been and are not expected to be significant.