Bank of America Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Securitizations and Other Variable Interest Entities

Securitizations and Other Variable Interest Entities

6 Months Ended

Jun. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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 June 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 June 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 six months ended June 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 six months ended June 30, 2017 and 2016.




First-lien Mortgage Securitizations


	Residential Mortgage - Agency								Commercial Mortgage
	Three Months Ended June 30				Six Months Ended June 30				Three Months Ended June 30					Six Months Ended June 30
(Dollars in millions)	2017		2016		2017		2016		2017		2016			2017		2016
Cash proceeds from new securitizations⁽¹⁾	$	3,302	$	4,375	$	7,958	$	11,449	$	1,097	$	732		$	1,706	$	1,979
Gain (loss) on securitizations ⁽²⁾	61		70		100		233		35		(6		)	53		(9		)
Repurchases from securitization trusts ⁽³⁾	602		645		1,474		1,374		—		—			—		—


⁽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 $42 million and $132 million, net of hedges, during the three and six months ended June 30, 2017 compared to $92 million and $200 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 $288 million and $563 million in connection with first-lien mortgage securitizations for the three and six months ended June 30, 2017 compared to $1.0 billion and $1.9 billion for the same periods in 2016. The receipt of these securities represents non-cash operating and investing activities and, accordingly, is not reflected on 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 six months ended June 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 $304.9 billion and $371.0 billion at June 30, 2017 and 2016. Servicing fee and ancillary fee income on serviced loans was $233 million and $478 million during the three and six months ended June 30, 2017 compared to $299 million and $601 million for the same periods in 2016. Servicing advances on serviced loans, including loans serviced for others and loans held for investment were $5.4 billion and $6.2 billion at June 30, 2017 and December 31, 2016. For more information on MSRs, see Note 14 – Fair Value Measurements.

During the six months ended June 30, 2016, the Corporation deconsolidated agency residential mortgage securitization vehicles with total assets of $2.8 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 $114 million related to the deconsolidations were 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 June 30, 2017 and December 31, 2016.




First-lien Mortgage VIEs

	Residential Mortgage
					Non-agency
	Agency				Prime				Subprime				Alt-A				Commercial Mortgage
(Dollars in millions)	June 30 2017		December 31 2016		June 30 2017		December 31 2016		June 30 2017		December 31 2016		June 30 2017		December 31 2016		June 30 2017		December 31 2016
Unconsolidated VIEs
Maximum loss exposure ⁽¹⁾	$	20,056	$	22,661	$	661	$	757	$	2,596	$	2,750	$	504	$	560	$	372	$	344
On-balance sheet assets
Senior securities held ⁽²⁾:
Trading account assets	$	463	$	1,399	$	13	$	20	$	6	$	112	$	78	$	118	$	64	$	51
Debt securities carried at fair value	16,138		17,620		385		441		2,195		2,235		307		305		—		—
Held-to-maturity securities	3,444		3,630		—		—		—		—		—		—		93		64
Subordinate securities held ⁽²⁾:
Trading account assets	—		—		1		1		15		23		1		1		22		14
Debt securities carried at fair value	—		—		6		8		2		2		21		23		48		54
Held-to-maturity securities	—		—		—		—		—		—		—		—		—		13
Residual interests held	—		—		—		—		—		—		—		—		24		25
All other assets ⁽³⁾	11		12		24		28		—		—		97		113		—		—
Total retained positions	$	20,056	$	22,661	$	429	$	498	$	2,218	$	2,372	$	504	$	560	$	251	$	221
Principal balance outstanding ⁽⁴⁾	$	249,610	$	265,332	$	11,678	$	16,280	$	17,853	$	19,373	$	31,141	$	35,788	$	18,393	$	23,826

Consolidated VIEs
Maximum loss exposure ⁽¹⁾	$	16,009	$	18,084	$	—	$	—	$	—	$	—	$	—	$	25	$	—	$	—
On-balance sheet assets
Trading account assets	$	137	$	434	$	—	$	—	$	—	$	—	$	—	$	99	$	—	$	—
Loans and leases	15,581		17,223		—		—		—		—		—		—		—		—
All other assets	291		427		—		—		—		—		—		—		—		—
Total assets	$	16,009	$	18,084	$	—	$	—	$	—	$	—	$	—	$	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 liability 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 six months ended June 30, 2017, the Corporation recognized $1 million and $16 million compared to $2 million and $4 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 six months ended June 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 $136 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 $136 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 June 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 June 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)	June 30 2017			December 31 2016			June 30 2017			December 31 2016			June 30 2017		December 31 2016		June 30 2017		December 31 2016
Unconsolidated VIEs
Maximum loss exposure	$	2,283		$	2,732		$	—		$	—		$	9,561	$	9,906	$	1,617	$	1,635
On-balance sheet assets
Senior securities held ^{(4, 5)}:
Trading account assets	$	—		$	—		$	—		$	—		$	1,312	$	902	$	9	$	—
Debt securities carried at fair value	41			46			—			—			2,036		2,338		—		—
Held-to-maturity securities	—			—			—			—			6,115		6,569		—		—
Subordinate securities held ^{(4, 5)}:
Trading account assets	—			—			—			—			26		27		—		—
Debt securities carried at fair value	—			—			—			—			72		70		—		—
Total retained positions	$	41		$	46		$	—		$	—		$	9,561	$	9,906	$	9	$	—
Total assets of VIEs ⁽⁶⁾	$	3,142		$	4,274		$	—		$	—		$	19,645	$	22,155	$	2,340	$	2,406

Consolidated VIEs
Maximum loss exposure	$	128		$	149		$	23,557		$	25,859		$	256	$	420	$	1,210	$	1,442
On-balance sheet assets
Trading account assets	$	—		$	—		$	—		$	—		$	723	$	1,428	$	1,213	$	1,454
Loans and leases	208			244			32,873			35,135			—		—		—		—
Allowance for loan and lease losses	(14		)	(16		)	(982		)	(1,007		)	—		—		—		—
All other assets	6			7			687			793			—		—		1		—
Total assets	$	200		$	235		$	32,578		$	34,921		$	723	$	1,428	$	1,214	$	1,454
On-balance sheet liabilities
Short-term borrowings	$	—		$	—		$	—		$	—		$	—	$	—	$	97	$	348
Long-term debt	90			108			8,998			9,049			467		1,008		—		12
All other liabilities	—			—			23			13			—		—		4		—
Total liabilities	$	90		$	108		$	9,021		$	9,062		$	467	$	1,008	$	101	$	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 liability for representations and warranties obligations and corporate guarantees. For additional information, see Note 7 – Representations and Warranties Obligations and Corporate Guarantees.


⁽²⁾	At June 30, 2017 and December 31, 2016, loans and leases in the consolidated credit card trust included $15.4 billion and $17.6 billion of seller’s interest.


⁽³⁾	At June 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⁾

As a holder of these securities, the Corporation receives scheduled principal and interest payments. During the three and six months ended June 30, 2017, the Corporation recognized $0 and $2 million compared to $1 million and $2 million for the same periods in 2016 of credit-related impairment losses in earnings on securities classified as AFS debt securities. During the three and six months ended June 30, 2017 and 2016, the Corporation recognized no credit-related impairment losses in earnings on securities classified as HTM.


⁽⁵⁾	The retained senior and subordinate securities were valued using quoted market prices or observable market inputs (Level 2 of the fair value hierarchy).


⁽⁶⁾	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 six months ended June 30, 2017 and 2016, $2.0 billion and $750 million of new senior debt securities were issued to third-party investors from the credit card securitization trust.

At both June 30, 2017 and December 31, 2016, the Corporation held subordinate securities issued by the credit card securitization trust with a notional principal amount of $7.5 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 $323 million of these subordinate securities issued during the six months ended June 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 $7.3 billion and $15.1 billion of securities during the three and six months ended June 30, 2017 compared to $8.1 billion and $14.7 billion for the same periods in 2016. Securities transferred into resecuritization vehicles during the three and six months ended June 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 $1.1 billion and $1.8 billion during the three and six months ended June 30, 2017 compared to $1.1 billion and $2.2 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 June 30, 2017 and December 31, 2016. The weighted-average remaining life of bonds held in the trusts at June 30, 2017 was 5.3 years. There were no material write-downs or downgrades of assets or issuers during the six months ended June 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 June 30, 2017 and December 31, 2016.




Other VIEs

	June 30, 2017									December 31, 2016
(Dollars in millions)	Consolidated			Unconsolidated			Total			Consolidated			Unconsolidated			Total
Maximum loss exposure	$	5,428		$	18,105		$	23,533		$	6,114		$	17,754		$	23,868
On-balance sheet assets
Trading account assets	$	2,470		$	277		$	2,747		$	2,358		$	233		$	2,591
Debt securities carried at fair value	—			231			231			—			122			122
Loans and leases	2,942			3,746			6,688			3,399			3,249			6,648
Allowance for loan and lease losses	(8		)	(30		)	(38		)	(9		)	(24		)	(33		)
Loans held-for-sale	93			102			195			188			464			652
All other assets	151			13,410			13,561			369			13,156			13,525
Total	$	5,648		$	17,736		$	23,384		$	6,305		$	17,200		$	23,505
On-balance sheet liabilities
Long-term debt ⁽¹⁾	$	210		$	—		$	210		$	395		$	—		$	395
All other liabilities	23			3,065			3,088			24			2,959			2,983
Total	$	233		$	3,065		$	3,298		$	419		$	2,959		$	3,378
Total assets of VIEs	$	5,648		$	66,088		$	71,736		$	6,305		$	62,269		$	68,574


⁽¹⁾	Includes $13 million and $229 million of long-term debt at June 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 $2.2 billion and $2.9 billion at June 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 $41 million and $323 million at June 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 $508 million and $430 million at June 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 June 30, 2017 and December 31, 2016, the Corporation’s consolidated investment vehicles had total assets of $626 million and $846 million. The Corporation also held investments in unconsolidated vehicles with total assets of $21.2 billion and $17.3 billion at June 30, 2017 and December 31, 2016. The Corporation’s maximum loss exposure associated with both consolidated and unconsolidated investment vehicles totaled $4.9 billion and $5.1 billion at June 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 $58 million and $75 million at June 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 $2.4 billion and $2.6 billion at June 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 $13.3 billion and $12.6 billion at June 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 $7.5 billion and $7.4 billion, including unfunded commitments to provide capital contributions of $2.7 billion and $2.7 billion at June 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 $281 million and $532 million, and reported pre-tax losses in other noninterest income of $207 million and $403 million for the three and six months ended June 30, 2017. For the same periods in 2016, the Corporation recognized tax credits and other tax benefits of $289 million and $482 million, and pre-tax losses of $198 million and $396 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.