Securitizations and Other Variable Interest Entities
|12 Months Ended|
Dec. 31, 2018
|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. The Corporation routinely securitizes loans and debt securities using VIEs as a source of funding for the Corporation and as a means of transferring the economic risk of the loans or debt securities to third parties. The assets are transferred into a trust or other securitization vehicle such that the assets are legally isolated from the creditors of the Corporation and are not available to satisfy its obligations. These assets can only be used to settle obligations of the trust or other securitization vehicle. The Corporation also administers, structures or invests in other VIEs including CDOs, investment vehicles and other entities. For more information on the Corporation’s use of VIEs, see Note 1 – Summary of Significant Accounting Principles.
The tables in this Note present the assets and liabilities of consolidated and unconsolidated VIEs at December 31, 2018 and 2017 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 December 31, 2018 and 2017 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 4 – Securities or Note 5 – Outstanding Loans and Leases. In addition, the Corporation has used VIEs such as trust preferred securities trusts in connection with its funding activities. In 2018, the Corporation redeemed trust preferred securities with a total carrying value of $3.1 billion resulting in the extinguishment of the related junior subordinated notes issued by the Corporation. In connection therewith, the Corporation recorded a charge to other income of $729 million primarily due to the difference between the carrying and redemption values of the trust preferred securities, the majority of which relates to the discount on the junior subordinated notes resulting from prior acquisitions. For more information on trust preferred securities, see Note 11 – Long-term Debt. These VIEs, which are generally not consolidated by the Corporation, as applicable, are not included in the tables herein.
The Corporation did not provide financial support to consolidated or unconsolidated VIEs during 2018, 2017 and 2016 that it was not previously contractually required to provide, nor does it intend to do so.
The Corporation had liquidity commitments, including written put options and collateral value guarantees, with certain
unconsolidated VIEs of $218 million and $442 million at December 31, 2018 and 2017.
First-lien Mortgage Securitizations
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, generally in the form of RMBS guaranteed by government-sponsored enterprises, FNMA and FHLMC (collectively the GSEs), or the Government National Mortgage Association (GNMA) primarily in the case of FHA-insured and U.S. Department of Veterans Affairs (VA)-guaranteed mortgage loans. Securitization usually occurs in conjunction with or shortly after origination or purchase, and the Corporation may also securitize loans held in its residential mortgage portfolio. In addition, the Corporation may, from time to time, securitize commercial mortgages it originates or purchases from other entities. The Corporation typically services the loans it securitizes. Further, the Corporation may retain beneficial interests in the securitization trusts including senior and subordinate securities and equity tranches issued by the trusts. Except as described in Note 12 – Commitments and Contingencies, 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 2018, 2017 and 2016.
In addition to cash proceeds as reported in the table above, the Corporation received securities with an initial fair value of $711 million, $1.9 billion and $4.2 billion in connection with first-lien mortgage securitizations in 2018, 2017 and 2016, respectively. Substantially all of these securities are classified as Level 2 assets within the fair value hierarchy.
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 $226.6 billion and $277.6 billion at December 31, 2018 and 2017. Servicing fee and ancillary fee income on serviced loans was $710 million, $893 million and $1.2 billion in 2018, 2017 and 2016, respectively. Servicing advances on serviced loans, including loans serviced for others and loans held for investment, were $3.3 billion and $4.5 billion at December 31, 2018 and 2017. For more information on MSRs, see Note 20 – Fair Value Measurements.
There were no significant deconsolidations of agency residential mortgage securitizations in 2018 or 2017. During 2016, the Corporation deconsolidated agency residential mortgage securitization vehicles with total assets of $3.8 billion and total liabilities of $628 million following the sale of retained interests to third parties, after which the Corporation no longer had the unilateral ability to liquidate the vehicles. Of the balances deconsolidated in 2016, $706 million of assets and $628 million of liabilities represent non-cash investing and financing activities and, accordingly, are not reflected on the Consolidated Statement of Cash Flows. A gain on sale of $125 million in 2016 related to the deconsolidation was recorded in other income in the Consolidated Statement of Income.
The following table summarizes select information related to first-lien mortgage securitization trusts in which the Corporation held a variable interest at December 31, 2018 and 2017.
Other Asset-backed Securitizations
The table below summarizes select information related to home equity, credit card and other asset-backed VIEs in which the Corporation held a variable interest at December 31, 2018 and 2017.
Home Equity Loans
The Corporation retains interests in home equity securitization trusts, primarily senior securities, to which it transferred home equity loans. 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 portion of the home equity lines of credit (HELOCs), 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 subordinate interests in accrued interest and fees on the securitized receivables and cash reserve accounts.
During 2018, 2017 and 2016, new senior debt securities issued to third-party investors from the credit card securitization trust were $4.0 billion, $3.1 billion and $750 million, respectively.
At December 31, 2018 and 2017, the Corporation held subordinate securities issued by the credit card securitization trust with a notional principal amount of $7.7 billion and $7.4 billion. These securities serve as a form of credit enhancement to the senior debt securities and have a stated interest rate of zero percent. During 2018, 2017 and 2016, the credit card securitization trust issued $650 million, $500 million and $121 million, respectively, of these subordinate securities.
The Corporation transfers securities, typically MBS, into resecuritization VIEs 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 $22.8 billion, $25.1 billion and $23.4 billion of securities in 2018, 2017 and 2016, respectively. Securities transferred into resecuritization VIEs 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. During 2018, 2017 and 2016, resecuritization proceeds included securities with an initial fair value of $4.1 billion, $3.3 billion and $3.3 billion, respectively. Substantially all of the other 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 $2.1 billion and $1.6 billion at December 31, 2018 and 2017. The weighted-average remaining life of bonds held in the trusts at December 31, 2018 was 7.3 years. There were no material write-downs or downgrades of assets or issuers during 2018, 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 December 31, 2018 and 2017.
Customer VIEs include credit-linked, equity-linked and commodity-linked note VIEs, repackaging VIEs and asset acquisition VIEs, 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 VIEs totaled $2.1 billion and $2.3 billion at December 31, 2018 and 2017, 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 VIEs.
Collateralized Debt Obligation VIEs
The Corporation receives fees for structuring CDO VIEs, which hold diversified pools of fixed-income securities, typically corporate debt or ABS, which the CDO VIEs 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 $421 million and $358 million at December 31, 2018 and 2017.
The Corporation sponsors, invests in or provides financing, which may be in connection with the sale of assets, to a variety of investment VIEs 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 December 31, 2018 and 2017, the Corporation’s consolidated investment VIEs had total assets of $270 million and $249 million. The Corporation also held investments in unconsolidated VIEs with total assets of $37.7 billion and $20.3 billion at December 31, 2018 and 2017. The Corporation’s maximum loss exposure associated with both consolidated and unconsolidated investment VIEs totaled $7.2 billion and $5.7 billion at December 31, 2018 and 2017 comprised primarily of on-balance sheet assets less non-recourse liabilities.
Leveraged Lease Trusts
The Corporation’s net investment in consolidated leveraged lease trusts totaled $1.8 billion and $2.0 billion at December 31, 2018 and 2017. 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 VIEs
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 VIE. 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 $17.0 billion and $13.8 billion at December 31, 2018 and 2017. 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 $8.9 billion and $8.0 billion, including unfunded commitments to provide capital contributions of $3.8 billion and $3.1 billion at December 31, 2018 and 2017. The unfunded commitments are expected to be paid over the next five years. During 2018, 2017 and 2016, the Corporation recognized tax credits and other tax benefits from investments in affordable housing partnerships of $981 million, $1.0 billion and $1.1 billion and reported pretax losses in other income of $798 million, $766 million and $789 million, respectively. 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.
The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef