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

9 Months Ended

Sep. 30, 2018

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. The tables in this Note present the assets, liabilities and maximum loss exposure of consolidated and unconsolidated VIEs at September 30, 2018 and December 31, 2017 where the Corporation has continuing involvement with transferred assets or if the Corporation otherwise has a variable interest in the VIE. For additional information on the Corporation’s use of VIEs and related maximum loss exposure, 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 2017 Annual Report on Form 10-K.

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.

Except as described below, the Corporation did not provide financial support to consolidated or unconsolidated VIEs during the nine months ended September 30, 2018 or the year ended December 31, 2017 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 $271 million and $442 million at September 30, 2018 and December 31, 2017.

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 10 – 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 the three and nine months ended September 30, 2018 and 2017.




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)	2018		2017		2018		2017		2018		2017		2018		2017
Cash proceeds from new securitizations⁽¹⁾	$	1,596	$	3,833	$	4,661	$	11,791	$	1,797	$	1,225	$	3,981	$	2,931
Gains on securitizations ⁽²⁾	13		40		54		140		29		14		68		67
Repurchases from securitization trusts ⁽³⁾	357		609		1,215		2,083		—		—		—		—


⁽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 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 $15 million and $60 million, net of hedges, during the three and nine months ended September 30, 2018, compared to $63 million and $195 million for the same periods in 2017, 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 $169 million and $566 million in connection with first-lien mortgage securitizations for the three and nine months ended September 30, 2018, compared to $770 million and $1.3 billion for the same periods in 2017. 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, 2018 and 2017, 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 $234.4 billion and $289.3 billion at September 30, 2018 and 2017. Servicing fee and ancillary fee income on serviced loans was $168 million and $546 million during the three and nine months ended September 30, 2018, compared to $213 million and $691 million for the same periods in 2017. Servicing advances on serviced loans, including loans serviced for others and loans held for investment, were $3.5 billion and $4.5 billion at September 30, 2018 and December 31, 2017. For more information on MSRs, see Note 14 – Fair Value Measurements.

During the three and nine months ended September 30, 2018 and 2017, there were no significant deconsolidations of agency residential mortgage securitizations.

The table below summarizes select information related to first-lien mortgage securitization trusts in which the Corporation held a variable interest at September 30, 2018 and December 31, 2017.




First-lien Mortgage VIEs
	Residential Mortgage
					Non-agency
	Agency				Prime				Subprime				Alt-A				Commercial Mortgage
(Dollars in millions)	Sept 30 2018		December 31 2017		Sept 30 2018		December 31 2017		Sept 30 2018		December 31 2017		Sept 30 2018		December 31 2017		Sept 30 2018		December 31 2017
Unconsolidated VIEs
Maximum loss exposure ⁽¹⁾	$	16,461	$	19,110	$	458	$	689	$	2,063	$	2,643	$	218	$	403	$	659	$	585
On-balance sheet assets
Senior securities:
Trading account assets	$	509	$	716	$	21	$	6	$	47	$	10	$	71	$	50	$	57	$	108
Debt securities carried at fair value	10,232		15,036		262		477		1,592		2,221		145		351		—		—
Held-to-maturity securities	5,720		3,348		—		—		—		—		—		—		419		274
All other assets ⁽²⁾	—		10		3		5		66		38		2		2		44		88
Total retained positions	$	16,461	$	19,110	$	286	$	488	$	1,705	$	2,269	$	218	$	403	$	520	$	470
Principal balance outstanding ⁽³⁾	$	195,110	$	232,761	$	9,448	$	10,549	$	9,156	$	10,254	$	24,439	$	28,129	$	31,251	$	26,504

Consolidated VIEs
Maximum loss exposure ⁽¹⁾	$	13,206	$	14,502	$	551	$	571	$	—	$	—	$	—	$	—	$	—	$	—
On-balance sheet assets
Trading account assets	$	733	$	232	$	704	$	571	$	—	$	—	$	—	$	—	$	—	$	—
Loans and leases, net	12,312		14,030		—		—		—		—		—		—		—		—
All other assets	162		240		—		—		—		—		—		—		—		—
Total assets	$	13,207	$	14,502	$	704	$	571	$	—	$	—	$	—	$	—	$	—	$	—
Total liabilities	$	3	$	3	$	153	$	—	$	—	$	—	$	—	$	—	$	—	$	—

⁽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 more information, see Note 10 – Commitments and Contingencies and Note 14 – Fair Value Measurements.

⁽²⁾

Not included in the table above are all other assets of $12 million and $148 million, representing the unpaid principal balance of mortgage loans eligible for repurchase from unconsolidated residential mortgage securitization VIEs, principally guaranteed by GNMA, and all other liabilities of $12 million and $148 million, representing the principal amount that would be payable to the securitization VIEs if the Corporation was to exercise the repurchase option, at September 30, 2018 and December 31, 2017.


⁽³⁾	Principal balance outstanding includes loans where the Corporation was the transferor to securitization VIEs 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, credit card and other asset-backed VIEs in which the Corporation held a variable interest at September 30, 2018 and December 31, 2017.




Home Equity Loan, Credit Card and Other Asset-backed VIEs

	Home Equity ⁽¹⁾						Credit Card ^{(2, 3)}						Resecuritization Trusts				Municipal Bond Trusts
(Dollars in millions)	Sept 30 2018			December 31 2017			Sept 30 2018			December 31 2017			Sept 30 2018		December 31 2017		Sept 30 2018		December 31 2017
Unconsolidated VIEs
Maximum loss exposure	$	1,101		$	1,522		$	—		$	—		$	8,185	$	8,204	$	1,837	$	1,631
On-balance sheet assets
Senior securities ⁽⁴⁾:
Trading account assets	$	—		$	—		$	—		$	—		$	1,757	$	869	$	22	$	33
Debt securities carried at fair value	29			36			—			—			1,380		1,661		—		—
Held-to-maturity securities	—			—			—			—			5,048		5,644		—		—
All other assets ⁽⁴⁾	—			—			—			—			—		30		—		—
Total retained positions	$	29		$	36		$	—		$	—		$	8,185	$	8,204	$	22	$	33
Total assets of VIEs ⁽⁵⁾	$	1,944		$	2,432		$	—		$	—		$	18,469	$	19,281	$	2,560	$	2,287

Consolidated VIEs
Maximum loss exposure	$	91		$	112		$	18,600		$	24,337		$	109	$	628	$	1,726	$	1,453
On-balance sheet assets
Trading account assets	$	—		$	—		$	—		$	—		$	376	$	1,557	$	1,740	$	1,452
Loans and leases	143			177			29,726			32,554			—		—		—		—
Allowance for loan and lease losses	(6		)	(9		)	(907		)	(988		)	—		—		—		—
All other assets	4			6			128			1,385			—		—		1		1
Total assets	$	141		$	174		$	28,947		$	32,951		$	376	$	1,557	$	1,741	$	1,453
On-balance sheet liabilities
Short-term borrowings	$	—		$	—		$	—		$	—		$	—	$	—	$	905	$	312
Long-term debt	59			76			10,320			8,598			267		929		12		—
All other liabilities	—			—			27			16			—		—		—		—
Total liabilities	$	59		$	76		$	10,347		$	8,614		$	267	$	929	$	917	$	312

⁽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 more information, see Note 10 – Commitments and Contingencies.


⁽²⁾	At September 30, 2018 and December 31, 2017, loans and leases in the consolidated credit card trust included $10.8 billion and $15.6 billion of seller’s interest.


⁽³⁾	At September 30, 2018 and December 31, 2017, all other assets in the consolidated credit card trust included restricted cash, certain short-term investments, and unbilled accrued interest and fees.


⁽⁴⁾	All other assets includes subordinate securities. 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 of VIEs includes 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 primarily include senior securities. 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.

There were no deconsolidations of HELOC trusts during the nine months ended September 30, 2018 and 2017.

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 the nine months ended September 30, 2018 and 2017, new senior debt securities issued to third-party investors from the credit card securitization trust were $4.0 billion and $3.1 billion.

At September 30, 2018 and December 31, 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. There were $650 million and $500 million of these subordinate securities issued during the nine months ended September 30, 2018 and 2017.

Resecuritization Trusts

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 $7.7 billion and $21.3 billion of securities during the three and nine months ended September 30, 2018 compared to $5.0 billion and $20.1 billion for the same periods in 2017. Securities transferred into resecuritization VIEs during the three and nine months ended September 30, 2018 and 2017 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 $1.5 billion and $3.7 billion during the three and nine months ended September 30, 2018 compared to $855 million and $2.7 billion for the same periods in 2017. 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 $1.8 billion and $1.6 billion at September 30, 2018 and December 31, 2017. The weighted-average remaining life of bonds held in the trusts at September 30, 2018 was 6.3 years. There were no material write-downs or downgrades of assets or issuers during the nine months ended September 30, 2018 and 2017.

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, 2018 and December 31, 2017.




Other VIEs

	Consolidated			Unconsolidated			Total			Consolidated			Unconsolidated			Total
(Dollars in millions)	September 30, 2018									December 31, 2017
Maximum loss exposure	$	4,407		$	21,188		$	25,595		$	4,660		$	19,785		$	24,445
On-balance sheet assets
Trading account assets	$	2,592		$	331		$	2,923		$	2,709		$	346		$	3,055
Debt securities carried at fair value	—			20			20			—			160			160
Loans and leases	1,977			4,155			6,132			2,152			3,596			5,748
Allowance for loan and lease losses	(2		)	(29		)	(31		)	(3		)	(32		)	(35		)
All other assets	62			15,300			15,362			89			15,216			15,305
Total	$	4,629		$	19,777		$	24,406		$	4,947		$	19,286		$	24,233
On-balance sheet liabilities
Long-term debt	$	213		$	—		$	213		$	270		$	—		$	270
All other liabilities	10			4,067			4,077			18			3,417			3,435
Total	$	223		$	4,067		$	4,290		$	288		$	3,417		$	3,705
Total assets of VIEs	$	4,629		$	79,564		$	84,193		$	4,947		$	69,746		$	74,693

Customer VIEs

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 $2.2 billion and $2.3 billion at September 30, 2018 and December 31, 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 $433 million and $358 million at September 30, 2018 and December 31, 2017.

Investment VIEs

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 September 30, 2018 and December 31, 2017, the Corporation’s consolidated investment VIEs had total assets of $337 million and $249 million. The Corporation also held investments in unconsolidated VIEs with total assets of $29.2 billion and $20.3 billion at September 30, 2018 and December 31, 2017. The Corporation’s maximum loss exposure associated with both consolidated and unconsolidated investment VIEs totaled $6.2 billion and $5.7 billion at September 30, 2018 and December 31, 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 September 30, 2018 and December 31, 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 $14.7 billion and $13.8 billion at September 30, 2018 and December 31, 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 $8.4 billion and $8.0 billion, including unfunded commitments to provide capital contributions of $3.6 billion and $3.1 billion at September 30, 2018 and December 31, 2017. 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 $265 million and $750 million, and reported pretax losses in other noninterest income of $215 million and $640 million for the three and nine months ended September 30, 2018. For the same periods in 2017, the Corporation recognized tax credits and other tax benefits of $293 million and $825 million, and pretax losses of $209 million and $612 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.