PNC Bank 2014 Annual Report Download - page 85

R ECOURSE AND R EPURCHASE O BLIGATIONS
As discussed in Note 2 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.
Commercial Mortgage Loan Recourse Obligations
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. Our exposure and activity associated with these
recourse obligations are reported in the Corporate &
Institutional Banking segment. For more information
regarding our commercial mortgage loan recourse obligations,
see the Recourse and Repurchase Obligations section of Note
22 Commitments and Guarantees included in the Notes To
Consolidated Financial Statements in Item 8 of this Report.
Residential Mortgage and Home Equity Repurchase
Obligations
As a result of alleged breaches of loan covenants and
representations and warranties, investors may request PNC to
indemnify them against losses on certain loans or to
repurchase loans. Indemnification and repurchase claims are
often settled on an individual basis through make whole
payments or loan repurchases, although we may also negotiate
pooled settlements with investors. In connection with pooled
settlements, we typically do not repurchase loans and the
consummation of such transactions generally results in us no
longer having indemnification and repurchase exposure with
the investor in the transaction.
Residential Mortgage Repurchase Obligations
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 2 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), 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 FHA
and VA-insured and uninsured loans pooled in GNMA
securitizations historically have been minimal. In addition to
indemnification and repurchase risk, we face other risks of
loss with respect to our participation in these programs, some
of which are described in Note 21 Legal Proceedings in the
Notes To Consolidated Financial Statements in Item 8 of this
Report with respect to governmental inquiries related to FHA-
insured loans. Repurchase obligation activity associated with
residential mortgages is reported in the Residential Mortgage
Banking segment.
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 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. To estimate the
mortgage repurchase liability arising from breaches of
representations and warranties, we consider the following
factors: (i) borrower performance in our historically sold
portfolio (both actual and estimated future defaults); (ii) the
level of outstanding unresolved repurchase claims;
(iii) estimated probable future repurchase claims, considering
information about expected investor behaviors, delinquent and
liquidated loans, resolved and unresolved mortgage insurance
rescission notices and our historical experience with claim
rescissions; (iv) the potential ability to cure the defects
identified in the repurchase claims (“rescission rate”) and
(v) the estimated severity of loss upon repurchase of the loan
or collateral, make-whole settlement or indemnification.
For more information on our Residential Mortgage
Repurchase Obligations, see Note 22 Commitments and
Guarantees in the Notes To Consolidated Financial Statements
in Item 8 of this Report.
The PNC Financial Services Group, Inc. – Form 10-K 67