PNC Bank 2011 Annual Report Download - page 208

R ECOURSE AND R EPURCHASE O BLIGATIONS
As discussed in Note 3 Loans Sale and Servicing Activities
and Variable Interest Entities, PNC has sold commercial
mortgage and residential mortgage loans directly or indirectly
in securitizations and whole-loan sale transactions with
continuing involvement. One form of continuing involvement
includes certain recourse and loan repurchase obligations
associated with the transferred assets in these transactions.
C OMMERCIAL M ORTGAGE L OAN R ECOURSE O BLIGATIONS
We originate, close and service certain multi-family
commercial mortgage loans which are sold to FNMA under
FNMA’s DUS program. We participated in a similar program
with the FHLMC.
Under these programs, we generally assume up to a one-third
pari passu risk of loss on unpaid principal balances through a
loss share arrangement. At December 31, 2011 and
December 31, 2010, the unpaid principal balance outstanding
of loans sold as a participant in these programs was $13.0
billion and $13.2 billion, respectively. The potential maximum
exposure under the loss share arrangements was $4.0 billion at
both December 31, 2011 and December 31, 2010. We
maintain a reserve for estimated losses based upon our
exposure. The reserve for losses under these programs totaled
$47 million and $54 million as of December 31, 2011 and
December 31, 2010, respectively, and is included in Other
liabilities on our Consolidated Balance Sheet. If payment is
required under these programs, we would not have a
contractual interest in the collateral underlying the mortgage
loans on which losses occurred, although the value of the
collateral is taken into account in determining our share of
such losses. Our exposure and activity associated with these
recourse obligations are reported in the Corporate &
Institutional Banking segment.
Analysis of Commercial Mortgage Recourse Obligations
In millions 2011 2010
January 1 $54 $71
Reserve adjustments, net 19
Losses – loan repurchases and settlements (8) (2)
Loan sales (24)
December 31 $47 $54
R ESIDENTIAL M ORTGAGE L OAN AND H OME E QUITY
R EPURCHASE O BLIGATIONS
While residential mortgage loans are sold on a non-recourse
basis, we assume certain loan repurchase obligations
associated with mortgage loans we have sold to investors.
These loan repurchase obligations primarily relate to
situations where PNC is alleged to have breached certain
origination covenants and representations and warranties
made to purchasers of the loans in the respective purchase and
sale agreements. Residential mortgage loans covered by these
loan repurchase obligations include first and second-lien
mortgage loans we have sold through Agency securitizations,
Non-Agency securitizations, and whole-loan sale transactions.
As discussed in Note 3 in this Report, Agency securitizations
consist of mortgage loans sale transactions with FNMA,
FHLMC, and GNMA, while Non-Agency securitizations and
whole-loan sale transactions consist of mortgage loans sale
transactions with private investors. Our historical exposure
and activity associated with Agency securitization repurchase
obligations has primarily been related to transactions with
FNMA and FHLMC, as indemnification and repurchase losses
associated with FHA and VA-insured and uninsured loans
pooled in GNMA securitizations historically have been
minimal. Repurchase obligation activity associated with
residential mortgages is reported in the Residential Mortgage
Banking segment.
PNC’s repurchase obligations also include certain brokered
home equity loans/lines that were sold to a limited number of
private investors in the financial services industry by National
City prior to our acquisition. PNC is no longer engaged in the
brokered home equity lending business, and our exposure
under these loan repurchase obligations is limited to
repurchases of whole-loans sold in these transactions.
Repurchase activity associated with brokered home equity
loans/lines is reported in the Non-Strategic Assets Portfolio
segment.
Loan covenants and representations and warranties are
established through loan sale agreements with various
investors to provide assurance that PNC has sold loans to
investors of sufficient investment quality. Key aspects of such
covenants and representations and warranties include the
loan’s compliance with any applicable loan criteria established
by the investor, including underwriting standards, delivery of
all required loan documents to the investor or its designated
party, sufficient collateral valuation, and the validity of the
lien securing the loan. As a result of alleged breaches of these
contractual obligations, investors may request PNC to
indemnify them against losses on certain loans or to
repurchase loans.
These investor indemnification or repurchase claims are
typically settled on an individual loan basis through make-
whole payments or loan repurchases; however, on occasion
we may negotiate pooled settlements with investors.
Indemnifications for loss or loan repurchases typically occur
when, after review of the claim, we agree insufficient
evidence exists to dispute the investor’s claim that a breach of
a loan covenant and representation and warranty has occurred,
such breach has not been cured, and the effect of such breach
is deemed to have had a material and adverse effect on the
value of the transferred loan. Depending on the sale agreement
and upon proper notice from the investor, we typically
respond to such indemnification and repurchase requests
within 60 days, although final resolution of the claim may take
a longer period of time. With the exception of the sales
The PNC Financial Services Group, Inc. – Form 10-K 199