Capital One 2012 Annual Report Download - page 276

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Moreover, for the potential GSE repurchase liability remaining after bulk settlements, 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 repurchase liability remaining after bulk settlements are grounded in this history.
One of our subsidiaries entered into a bulk settlement with a GSE to resolve present and future repurchase claims
in the first quarter of 2012, and our reserves allocated to the GSE segment reflect the amount of that settlement.
For the $16 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 segment 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 current and future losses inherent within the securitization and apply legal judgment to the anticipated
factual and legal record to estimate the lifetime legal liability for each securitization. Our estimated legal liability
for each securitization within this category assumes that we will be responsible for only a portion of the losses
inherent in each securitization. Our litigation reserves with respect to the U.S. Bank Litigation, the DBSP
Litigation, and the Ambac Litigation, in each case as referenced below, are contained within the Active Insured
Securitization reserve category. Further, our litigation reserves with respect to indemnification risks from certain
representation and warranty lawsuits brought by monoline bond insurers against third-party securitizations
sponsors, where one of our subsidiaries provided some or all of the mortgage collateral within the securitization
but is not a defendant in the litigation, are also contained within this category.
For the $4 billion original principal balance of mortgage loans in the Inactive Insured Securitizations category
and the $80 billion original principal balance of mortgage loans in the Uninsured Securitizations and other whole
loan sales categories, we establish reserves by relying on our historical activity and 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 irregular nature of
repurchase activity within these categories. Some Uninsured Securitization investors from this category who
have not made repurchase requests or filed representation and warranty lawsuits are currently suing investment
banks and securitization sponsors under federal and/or state securities laws. Although we face some direct and
indirect indemnity risks from these litigations, we generally 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 totaled $899 million as of December 31, 2012, compared with
$943 million as of December 31, 2011. We recorded a total provision for mortgage representation and warranty
losses for our representation and warranty repurchase exposure of $349 million in 2012, which was primarily
driven by updated estimates of anticipated outcomes from various litigation and threatened litigation in the
insured securitization segment based on relevant factual and legal developments and an increased reserve
associated with a settlement in the first quarter of 2012 between a subsidiary and a GSE to resolve present and
future repurchase claims. The decrease in the reserve in 2012 was driven primarily by the settlement of claims.
During 2012, we had settlements of repurchase requests totaling $393 million that were charged against the
reserve.
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