Capital One 2010 Annual Report Download - page 86

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For the $5 billion original principal balance of mortgage loans in the Inactive Insured Securitizations category and the $82 billion
original principal balance of mortage loans in the Uninsured Securitizations and other whole loans sales categories, we establish
reserves by relying on our historical repurchase rates to estimate repurchase liabilities over the next twelve (12) months. We do not
believe we can estimate repurchase liability for these categories for a period longer than twelve (12) months because of the relatively
sporadic nature of repurchase requests from these categories. Although we have not seen any significant activity from new
counterparties from these categories, there has been a recent uptick in negotiation intensity from some counterparties who had
submitted repurchase claims in earlier quarters with respect to whole loans. In addition, some Uninsured Securitization investors from
this category have not made repurchase requests or filed representation and warranty lawsuits, but instead have filed class actions
under federal and state securities laws against investment banks and securitization sponsors. Although we face some indemnity risks
from these litigations, we have not established reserves with respect to these indemnity risks because we do not consider them to be
both probable and reasonably estimable liabilities.
The aggregate reserves for all three subsidiaries were $816 million as of December 31, 2010 as compared with $238 million as of
December 31, 2009. We recorded a total provision for repurchase losses for our representation and warranty repurchase exposure of
$636 million for the year ended December 31, 2010. During 2010, we had settlements of repurchase requests totaling $58 million that
were charged against the reserve. Table 26 summarizes changes in our representation and warranty reserves for the twelve months
ended December 31, 2010 and 2009.
Table 26: Changes in Representation and Warranty Reserves
Year Ended December 31,
(Dollars in millions) 2010 2009
Representation and warranty repurchase reserve, beginning of period(1) ................. $ 238 $ 140
Provision for repurchase losses(2) .................................................... 636(3) 181
N
et realized losses ................................................................. (58) (83)
Representation and warranty repurchase reserve, end of period(1) ...................... $ 816 $ 238
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(1) Reported in our consolidated balance sheets as a component of other liabilities.
(2) The portion of the provision for mortgage repurchase claims recognized in our consolidated statements of income as a component of non-
interest income totaled $204 million and $19 million, twelve months ended December 31, 2010 and 2009. The portion of the provision for
mortgage repurchase claims recognized in our consolidated statements of income as a component of discontinued operations totaled $432
million and $162 million, pre-tax, for the twelve months ended December 31, 2010 and 2009.
(3) Includes increases to the representation and warranty reserves in the first and second quarter of 2010 due primarily to counterparty activity and
our ability to extend the timeframe over which we estimate our repurchase liability in most cases to the full life of the mortgage loans sold by
our subsidiaries for groups of loans for which we believe repurchases are probable. More specifically, of the $636 million increase in
representation and warranty reserves for the twelve months ended December 31, 2010, approximately $407 million resulted from our extension
of repurchase liability estimates to the life of the loan effective in the second quarter of 2010. The remaining $229 million reserve accrual
related primarily to changing counterparty activity in the form of updated estimates around active and probable litigation, most of which
occurred in the first quarter of 2010.
As indicated in Table 27, almost all of the reserves relate to the $11 billion in original principal balance of mortgage loans sold
directly to the GSEs and to the $13 billion in mortgage loans sold to purchasers who placed them into Active Insured Securitizations.
Table 27: Allocation of Representation and Warranty Reserves
December 31, 2010
(Dollars in millions, except for loans sold) Loans Sold
2005 to 2008(1) Reserve Liability
GSEs and Active Insured Securitizations ............................................. $ 24 $ 796
Inactive Insured Securitizations and others ............................................ 87 20
Total ............................................................................ $ 111 $ 816
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(1) Reflects, in billions, the total original principal balance of mortgage loans originated by our subsidiaries and sold to third party investors
between 2005 and 2008.