PNC Bank 2011 Annual Report Download - page 209

agreements associated with the Agency securitizations, most
sale agreements do not provide for penalties or other remedies
if we do not respond timely to investor indemnification or
repurchase requests.
Origination and sale of residential mortgages is an ongoing
business activity and, accordingly, management continually
assesses the need to recognize indemnification and repurchase
liabilities pursuant to the associated investor sale agreements.
We establish indemnification and repurchase liabilities for
estimated losses on sold first and second-lien mortgages and
home equity loans/lines for which indemnification is expected
to be provided or for loans that are expected to be
repurchased. For the first and second-lien mortgage sold
portfolio, we have established an indemnification and
repurchase liability pursuant to investor sale agreements based
on claims made and our estimate of future claims on a loan by
loan basis. These relate primarily to loans originated during
2006-2008. For the home equity loans/lines sold portfolio, we
have established indemnification and repurchase liabilities
based upon this same methodology for loans sold during
2005-2007.
Indemnification and repurchase liabilities are initially
recognized when loans are sold to investors and are
subsequently evaluated by management. Initial recognition
and subsequent adjustments to the indemnification and
repurchase liability for the sold residential mortgage portfolio
are recognized in Residential mortgage revenue on the
Consolidated Income Statement. Since PNC is no longer
engaged in the brokered home equity lending business, only
subsequent adjustments are recognized to the home equity
loans/lines indemnification and repurchase liability. These
adjustments are recognized in Other noninterest income on the
Consolidated Income Statement.
Management’s subsequent evaluation of these indemnification
and repurchase liabilities is based upon trends in
indemnification and repurchase requests, actual loss
experience, risks in the underlying serviced loan portfolios,
and current economic conditions. As part of its evaluation,
management considers estimated loss projections over the life
of the subject loan portfolio. At December 31, 2011 and
December 31, 2010, the total indemnification and repurchase
liability for estimated losses on indemnification and
repurchase claims totaled $130 million and $294 million,
respectively, and was included in Other liabilities on the
Consolidated Balance Sheet. An analysis of the changes in this
liability during 2011 and 2010 follows:
Analysis of Indemnification and Repurchase Liability for Asserted Claims and Unasserted Claims
2011 2010
In millions
Residential
Mortgages (a)
Home Equity
Loans/Lines (b) Total
Residential
Mortgages (a)
Home Equity
Loans/Lines (b) Total
January 1 $ 144 $150 $294 $229 $ 41 $270
Reserve adjustments, net 102 4 106 120 144 264
Losses – loan repurchases and settlements (163) (107) (270) (205) (35) (240)
December 31 $ 83 $ 47 $130 $144 $150 $294
(a) Repurchase obligation associated with sold loan portfolios of $121.4 billion and $139.8 billion at December 31, 2011 and December 31, 2010, respectively.
(b) Repurchase obligation associated with sold loan portfolios of $4.5 billion and $6.5 billion at December 31, 2011 and December 31, 2010, respectively. PNC is no longer engaged in
the brokered home equity lending business, which was acquired with National City.
Management believes our indemnification and repurchase
liabilities appropriately reflect the estimated probable losses
on investor indemnification and repurchase claims at
December 31, 2011 and 2010. While management seeks to
obtain all relevant information in estimating the
indemnification and repurchase liability, the estimation
process is inherently uncertain and imprecise and,
accordingly, it is reasonably possible that future
indemnification and repurchase losses could be more or less
than our established liability. Factors that could affect our
estimate include the volume of valid claims driven by investor
strategies and behavior, our ability to successfully negotiate
claims with investors, housing prices, and other economic
conditions. At December 31, 2011, we estimate that it is
reasonably possible that we could incur additional losses in
excess of our indemnification and repurchase liability of up to
$85 million. This estimate of potential additional losses in
excess of our liability is based on assumed higher investor
demands, lower claim rescissions, and lower home prices than
our current assumptions.
R EINSURANCE A GREEMENTS
We have two wholly-owned captive insurance subsidiaries
which provide reinsurance to third-party insurers related to
insurance sold to our customers. These subsidiaries enter into
various types of reinsurance agreements with third-party
insurers where the subsidiary assumes the risk of loss through
either an excess of loss or quota share agreement up to 100%
reinsurance. In excess of loss agreements, these subsidiaries
assume the risk of loss for an excess layer of coverage up to
specified limits, once a defined first loss percentage is met. In
quota share agreements, the subsidiaries and third-party
insurers share the responsibility for payment of all claims.
These subsidiaries provide reinsurance for accidental death &
dismemberment, credit life, accident & health, lender placed
200 The PNC Financial Services Group, Inc. – Form 10-K