Capital One 2011 Annual Report Download - page 103

(1) The open pipeline includes all repurchase requests ever received by our subsidiaries where either the requesting party has
not formally rescinded the repurchase request and where our subsidiary has not agreed to either repurchase the loan at
issue or make the requesting party whole with respect to its losses. Accordingly, repurchase requests denied by our
subsidiaries and not pursued by the counterparty remain in the open pipeline. Moreover, repurchase requests submitted
by parties without contractual standing to pursue repurchase requests are included within the open pipeline unless the
requesting party has formally rescinded its repurchase request. Finally, the amounts reflected in this chart are the original
principal balance amounts of the mortgage loans at issue and do not correspond to the losses our subsidiary would incur
upon the repurchase of these loans.
(2) Activity in 2010 relates to repurchase demands from all years.
(3) Represents adjustments to correct the counterparty category as of December 31, 2011 for amounts that were
misclassified. The reclassification had no impact on the total pending repurchase requests; however, it resulted in an
increase in open claims attributable to GSEs and Insured Securitizations and a decrease in open claims attributable to
Uninsured Securitizations and Other.
We have established representation and warranty reserves for losses associated with the mortgage loans sold by
each subsidiary that we consider to be both probable and reasonably estimable, including both litigation and
non-litigation liabilities. These reserves are reported in our consolidated balance sheets as a component of other
liabilities. The reserve setting process relies heavily on estimates, which are inherently uncertain, and requires the
application of judgment. We evaluate these estimates on a quarterly basis. We build our representation and
warranty reserves through the provision for repurchase losses, which we report in our consolidated statements of
income as a component of non-interest income for loans originated and sold by Chevy Chase Bank and Capital
One Home Loans and as a component of discontinued operations for loans originated and sold by GreenPoint. In
establishing the representation and warranty reserves, we consider a variety of factors depending on the category
of purchaser.
In establishing reserves for the $11 billion original principal balance of GSE loans, we rely on the historical
relationship between GSE loan losses and repurchase outcomes to estimate: (1) the percentage of current and
future GSE loan defaults that we anticipate will result in repurchase requests from the GSEs over the lifetime of
the GSE loans; and (2) the percentage of those repurchase requests that we anticipate will result in actual
repurchases. We also rely on estimated collateral valuations and loss forecast models to estimate our lifetime
liability on GSE loans. This reserving approach to the GSE loans reflects the historical interaction with the GSEs
around repurchase requests, and also includes anticipated repurchases resulting from mortgage insurance
rescissions. The GSEs typically have stronger contractual rights than non-GSE counterparties because GSE
contracts typically do not contain prompt notice requirements for repurchase requests or materiality
qualifications to the representations and warranties. Moreover, although we often disagree with the GSEs about
the validity of their repurchase requests, we have established a negotiation pattern whereby the GSEs and our
subsidiaries continually negotiate around individual repurchase requests, leading to the GSEs rescinding some
repurchase requests and our subsidiaries agreeing in some cases to repurchase some loans or make the GSEs
whole with respect to losses. Our lifetime representation and warranty reserves with respect to GSE loans are
grounded in this history.
For the $13 billion original principal balance in Active Insured Securitizations, our reserving approach also
reflects our historical interaction with monoline bond insurers around repurchase requests. Typically, monoline
bond insurers allege a very high repurchase rate with respect to the mortgage loans in the Active Insured
Securitization category. In response to these repurchase requests, our subsidiaries typically request information
from the monoline bond insurers demonstrating that the contractual requirements around a valid repurchase
request have been satisfied. In response to these requests for supporting documentation, monoline bond insurers
typically initiate litigation. Accordingly, our reserves within the Active Insured Securitization are not based upon
the historical repurchase rate with monoline bond insurers, but rather upon the expected resolution of litigation
with the monoline bond insurers. Every bond insurer within this category is pursuing a substantially similar
litigation strategy either through active or probable litigation. Accordingly, our representation and warranty
reserves for this category are litigation reserves. In establishing litigation reserves for this category, we consider
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