Quarterly report pursuant to Section 13 or 15(d)

Securitizations and Other Variable Interest Entities

v3.20.2
Securitizations and Other Variable Interest Entities
6 Months Ended
Jun. 30, 2020
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 tables in this Note present the assets, liabilities and maximum loss exposure of consolidated and unconsolidated VIEs at June 30, 2020 and December 31, 2019 in situations where the Corporation has continuing involvement with transferred assets or if the Corporation otherwise has a variable interest in the VIE. For more information on the Corporation's use of VIEs and related maximum loss exposure, see Note 1 – Summary of Significant Accounting Principles and Note 7 – Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements of the Corporation’s 2019 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 and Allowance for Credit Losses.
The Corporation did not provide financial support to consolidated or unconsolidated VIEs during the six months ended June 30, 2020 or the year ended December 31, 2019 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 $933 million and $1.1 billion at June 30, 2020 and December 31, 2019.
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. Except as described 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 six months ended June 30, 2020 and 2019.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Proceeds from loan sales (1)
$
11,375

 
$
2,206

 
$
12,927

 
$
3,302

 
$
220

 
$
2,194

 
$
2,292

 
$
3,181

Gains (losses) on securitizations (2)
715

 
8

 
721

 
15

 
(1
)
 
28

 
40

 
45

Repurchases from securitization trusts (3)
167

 
242

 
295

 
486

 

 

 

 

(1) 
The Corporation transfers residential mortgage loans to securitizations sponsored primarily by the GSEs or Government National Mortgage Association (GNMA) in the normal course of business and primarily receives residential mortgage-backed securities in exchange. Substantially all of these securities are classified as Level 2 within the fair value hierarchy and are typically sold shortly after receipt.
(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 $34 million and $61 million, net of hedges, during the three and six months ended June 30, 2020 compared to $11 million and $19 million for the same periods in 2019, 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.
The Corporation recognizes consumer mortgage servicing rights (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 $183.4 billion and $210.5 billion at June 30, 2020 and 2019. Servicing fee and ancillary fee income on serviced loans was $124 million and $252 million during the three and six months ended June 30, 2020 compared to $144 million and $292 million for the same periods in 2019. Servicing advances on serviced loans, including loans serviced for others and loans held for investment, were $2.0 billion and $2.4 billion at June 30, 2020 and December 31, 2019. For more information on MSRs, see Note 14 – Fair Value Measurements.
During the three and six months ended June 30, 2019, the Corporation deconsolidated agency residential mortgage securitization trusts with total assets of $430 million and $1.1 billion. During the three months ended June 30, 2020, the Corporation completed the sale of $9.3 billion of consumer real estate loans through GNMA loan securitizations. As part of the securitizations, the Corporation retained $8.4 billion of mortgage-backed securities, which are classified as debt securities carried at fair value on the Consolidated Balance Sheet. Total gains on loan sales of $704 million 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, 2020 and December 31, 2019.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First-lien Mortgage VIEs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage
 
 

 

 
 

 

 
Non-agency
 
 

 

 
Agency
 
Prime
 
Subprime
 
Alt-A
 
Commercial Mortgage
(Dollars in millions)
June 30
2020
December 31
2019
 
June 30
2020
December 31
2019
 
June 30
2020
December 31
2019
 
June 30
2020
December 31
2019
 
June 30
2020
December 31
2019
Unconsolidated VIEs
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Maximum loss exposure (1)
$
15,177

$
12,554

 
$
307

$
340

 
$
1,457

$
1,622

 
$
101

$
98

 
$
1,084

$
1,036

On-balance sheet assets
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Senior securities:
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Trading account assets
$
254

$
627

 
$
11

$
5

 
$
28

$
54

 
$
35

$
24

 
$
58

$
65

Debt securities carried at fair value
9,089

6,392

 
167

193

 
1,071

1,178

 
65

72

 


Held-to-maturity securities
5,834

5,535

 


 


 


 
875

809

All other assets


 
7

2

 
30

49

 
1

2

 
39

38

Total retained positions
$
15,177

$
12,554

 
$
185

$
200

 
$
1,129

$
1,281

 
$
101

$
98

 
$
972

$
912

Principal balance outstanding (2)
$
154,300

$
160,226

 
$
7,022

$
7,268

 
$
7,275

$
8,594

 
$
18,393

$
19,878

 
$
55,693

$
60,129

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Maximum loss exposure (1)
$
554

$
10,857

 
$

$
5

 
$
21

$
44

 
$

$

 
$

$

On-balance sheet assets
 

 

 
 

 

 
 

 

 
 

 

 
 

 

Trading account assets
$
554

$
780

 
$
94

$
116

 
$
214

$
149

 
$

$

 
$

$

Loans and leases, net

9,917

 


 


 


 


All other assets

161

 


 


 


 


Total assets
$
554

$
10,858

 
$
94

$
116

 
$
214

$
149

 
$

$

 
$

$

Total liabilities
$

$
4

 
$
94

$
111

 
$
193

$
105

 
$

$

 
$

$

(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) 
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 following table summarizes select information related to home equity, credit card and other asset-backed VIEs in which the Corporation held a variable interest at June 30, 2020 and December 31, 2019.
 
 
 
 
 
 
 
 
 
 
 
 
Home Equity Loan, Credit Card and Other Asset-backed VIEs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home Equity (1)
 
Credit Card (2)
 
Resecuritization Trusts
 
Municipal Bond Trusts
(Dollars in millions)
June 30
2020
December 31
2019
 
June 30
2020
December 31
2019
 
June 30
2020
December 31
2019
 
June 30
2020
December 31
2019
Unconsolidated VIEs
 

 

 
 
 
 
 

 

 
 

 

Maximum loss exposure
$
348

$
412

 
$

$

 
$
9,673

$
7,526

 
$
3,309

$
3,701

On-balance sheet assets
 

 

 
 
 
 
 

 

 
 

 

Securities (3):
 

 

 
 
 
 
 

 

 
 

 

Trading account assets
$

$

 
$

$

 
$
1,067

$
2,188

 
$

$

Debt securities carried at fair value
9

11

 


 
3,107

1,126

 


Held-to-maturity securities


 


 
5,499

4,212

 


Total retained positions
$
9

$
11

 
$

$

 
$
9,673

$
7,526

 
$

$

Total assets of VIEs
$
862

$
1,023

 
$

$

 
$
20,951

$
21,234

 
$
3,826

$
4,395

 
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 

 

 
 
 
 
 

 

 
 

 

Maximum loss exposure
$
67

$
64

 
$
15,340

$
17,915

 
$
123

$
54

 
$
1,292

$
2,656

On-balance sheet assets
 

 

 
 
 
 
 

 

 
 

 

Trading account assets
$

$

 
$

$

 
$
141

$
73

 
$
1,252

$
2,480

Loans and leases
133

122

 
23,155

26,985

 


 


Allowance for loan and lease losses
16

(2
)
 
(1,882
)
(800
)
 


 


All other assets
3

3

 
462

119

 


 
40

176

Total assets
$
152

$
123

 
$
21,735

$
26,304

 
$
141

$
73

 
$
1,292

$
2,656

On-balance sheet liabilities
 

 

 
 
 
 
 

 

 
 

 

Short-term borrowings
$

$

 
$

$

 
$

$

 
$
715

$
2,175

Long-term debt
85

64

 
6,373

8,372

 
18

19

 


All other liabilities


 
22

17

 


 


Total liabilities
$
85

$
64

 
$
6,395

$
8,389

 
$
18

$
19

 
$
715

$
2,175

(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 June 30, 2020 and December 31, 2019, loans and leases in the consolidated credit card trust included $9.1 billion and $10.5 billion of seller’s interest.
(3) 
The retained senior securities were valued using quoted market prices or observable market inputs (Level 2 of the fair value hierarchy).
Home Equity Loans
The Corporation retains interests, primarily senior securities, in home equity securitization trusts 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 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.
No new senior debt securities were issued to third-party investors from the credit card securitization trust during the six months ended June 30, 2020 and 2019.
At June 30, 2020 and December 31, 2019, the Corporation held subordinate securities issued by the credit card securitization trust with a notional principal amount of $7.0 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. No subordinate securities were issued by the credit card securitization trust during the six months ended June 30, 2020 and 2019.
Resecuritization Trusts
The Corporation transfers securities, typically MBS, into resecuritization VIEs generally 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 $10.7 billion and $18.1 billion of securities during the three and six months ended June 30, 2020 compared to $4.1 billion and $8.5 billion for the same periods in 2019. Securities transferred into resecuritization VIEs were measured at fair value with changes in fair value recorded in market making and similar activities prior to the resecuritization and,
accordingly, no gain or loss on sale was recorded. Securities received from the resecuritization VIEs were recognized at their fair value of $4.4 billion and $4.9 billion during the three and six months ended June 30, 2020 compared to $1.5 billion and $2.8 billion for the same periods in 2019, of which substantially all of the securities in the prior-year period were classified as trading account assets. Of the securities received as resecuritization proceeds during the three months ended June 30, 2020, $654 million, $2.1 billion and $1.7 billion were classified as trading account assets, debt securities carried at fair value and HTM securities, respectively. Of the securities received as resecuritizations proceeds during the six months ended June 30, 2020, $1.2 billion, $2.1 billion and $1.7 billion were classified as trading account assets, debt securities carried at fair value and HTM securities, respectively. Substantially all of the trading account securities and debt securities carried at fair value 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 $3.3 billion and $3.7 billion at June 30, 2020 and December 31, 2019. The weighted-average remaining life of bonds held in the trusts at June 30, 2020 was 7.0 years. There were no significant write-downs or downgrades of assets or issuers during the six months ended June 30, 2020 and 2019.
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, 2020 and December 31, 2019.
 
 
 
 
 
 
 
 
 
 
 
 
Other VIEs
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
Unconsolidated
 
Total
 
Consolidated
 
Unconsolidated
 
Total
(Dollars in millions)
June 30, 2020
 
December 31, 2019
Maximum loss exposure
$
4,313

 
$
25,745

 
$
30,058

 
$
4,055

 
$
26,326

 
$
30,381

On-balance sheet assets
 

 
 

 
 

 
 

 
 

 
 

Trading account assets
$
2,135

 
$
597

 
$
2,732

 
$
2,213

 
$
549

 
$
2,762

Debt securities carried at fair value

 
71

 
71

 

 
74

 
74

Loans and leases
2,244

 
3,045

 
5,289

 
1,810

 
3,214

 
5,024

Allowance for loan and lease losses
(3
)
 
(130
)
 
(133
)
 
(2
)
 
(38
)
 
(40
)
All other assets
58

 
21,409

 
21,467

 
81

 
20,547

 
20,628

Total
$
4,434

 
$
24,992

 
$
29,426

 
$
4,102

 
$
24,346

 
$
28,448

On-balance sheet liabilities
 

 
 

 
 

 
 

 
 

 
 

Short-term borrowings
$
24

 
$

 
$
24

 
$

 
$

 
$

Long-term debt
98

 

 
98

 
46

 

 
46

All other liabilities

 
5,190

 
5,190

 
2

 
5,087

 
5,089

Total
$
122

 
$
5,190

 
$
5,312

 
$
48

 
$
5,087

 
$
5,135

Total assets of VIEs
$
4,434

 
$
101,761

 
$
106,195

 
$
4,102

 
$
98,491

 
$
102,593


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 $2.1 billion and $2.2 billion at June 30, 2020 and December 31, 2019, 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 $245 million and $304 million at June 30, 2020 and December 31, 2019.
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 June 30, 2020 and December 31, 2019, the Corporation’s consolidated investment VIEs had total assets of $601 million and $104 million. The Corporation also held investments in unconsolidated VIEs with total assets of $35.1 billion and $32.4 billion at June 30, 2020 and December 31, 2019. The Corporation’s maximum loss exposure associated with both consolidated and unconsolidated investment VIEs totaled $6.3 billion and $6.4 billion at June 30, 2020 and December 31, 2019 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 $1.7 billion at both June 30, 2020 and December 31, 2019. 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 $19.6 billion and $18.9 billion at June 30, 2020 and December 31, 2019. 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 $10.3 billion and $10.0 billion, including unfunded commitments to provide capital contributions of $4.6 billion and $4.3 billion at June 30, 2020 and December 31, 2019. 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 $342 million and $610 million and reported pretax losses in other income of $255 million and $527 million for the three and six months ended June 30, 2020. For the same periods in 2019, the Corporation recognized tax credits and other tax benefits of $291 million and $571 million and reported pretax losses in other income of $234 million and $482 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.