PNC Bank 2012 Annual Report Download - page 97

R ECOURSE A ND R EPURCHASE
O BLIGATIONS
As discussed in Note 3 Loan Sale and Servicing Activities and
Variable Interest Entities in the Notes To Consolidated
Financial Statements in Item 8 of this Report, PNC has sold
commercial mortgage, residential mortgage and home equity
loans directly or indirectly through securitization and loan sale
transactions in which we have continuing involvement. One
form of continuing involvement includes certain recourse and
loan repurchase obligations associated with the transferred
assets.
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 Delegated Underwriting and Servicing (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, 2012 and
December 31, 2011, the unpaid principal balance outstanding
of loans sold as a participant in these programs was $12.8
billion and $13.0 billion, respectively. The potential maximum
exposure under the loss share arrangements was $3.9 billion at
December 31, 2012 and $4.0 billion at December 31, 2011.
We maintain a reserve for estimated losses based on our
exposure. The reserve for losses under these programs totaled
$43 million and $47 million as of December 31, 2012 and
December 31, 2011, 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.
R ESIDENTIAL M ORTGAGE 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 loan sale transactions. As
discussed in Note 3 Loan Sale and Servicing Activities and
Variable Interest Entities in the Notes To Consolidated
Financial Statements in Item 8 of this Report, Agency
securitizations consist of mortgage loan sale transactions with
FNMA, FHLMC, and the Government National Mortgage
Association (GNMA) program, while Non-agency
securitizations consist of mortgage loan sale transactions with
private investors. Mortgage loan sale transactions that are not
part of a securitization may involve FNMA, FHLMC or
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 Federal Housing Agency (FHA) and Department of
Veterans Affairs (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.
Loan covenants and representations and warranties are
established through loan sale agreements with various
investors to provide assurance that PNC has sold loans that are
of sufficient investment quality. Key aspects of such
covenants and representations and warranties include the
loan’s compliance with any applicable loan criteria established
for the transaction, 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.
We investigate every investor claim on a loan by loan basis to
determine the existence of a legitimate claim, and that all
other conditions for indemnification or repurchase have been
met prior to the settlement with that investor. 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 90 days,
although final resolution of the claim may take a longer period
of time. With the exception of the sales 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.
78 The PNC Financial Services Group, Inc. – Form 10-K