PNC Bank 2015 Annual Report Download - page 225

Recourse and Repurchase Obligations
As discussed in Note 2 Loan Sale and Servicing Activities and
Variable Interest Entities, PNC has sold commercial
mortgage, residential mortgage and home equity loans/lines of
credit 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 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, 2015 and
December 31, 2014, the unpaid principal balance outstanding
of loans sold as a participant in these programs was $12.9
billion and $12.3 billion, respectively. The potential maximum
exposure under the loss share arrangements was $3.8 billion at
December 31, 2015 and $3.7 billion at December 31, 2014.
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.
We maintain a reserve for estimated losses based upon our
exposure. The reserve for losses under these programs totaled
$27 million and $35 million at December 31, 2015 and
December 31, 2014, respectively, and was included in Other
liabilities on the Consolidated Balance Sheet.
Residential Mortgage Loan 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. Repurchase obligation activity associated
with residential mortgages is reported in the Residential
Mortgage Banking segment.
Indemnifications 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.
Management’s subsequent evaluation of 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, 2015 and December 31, 2014, the residential
mortgage indemnification and repurchase liability for
estimated losses on indemnification and repurchase claims
totaled $94 million and $107 million, respectively, and was
included in Other liabilities on the Consolidated Balance
Sheet. The unpaid principal balance of loans associated with
our exposure to this repurchase obligation totaled $65.3 billion
and $68.3 billion at December 31, 2015 and December 31,
2014, respectively.
Management believes the indemnification and repurchase
liabilities appropriately reflect the estimated probable losses
on indemnification and repurchase claims for all loans sold
and outstanding as of December 31, 2015. In making these
estimates, we consider the losses that we expect to incur over
the life of the sold loans. 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, 2015, we
estimate that it is reasonably possible that we could incur
additional losses in excess of our accrued indemnification and
repurchase liability of up to approximately $77 million for our
portfolio of residential mortgage loans sold. This estimate of
potential additional losses in excess of our liability is based on
assumed higher repurchase claims and lower claim rescissions
than our current assumptions.
Home Equity Loan/Line of Credit Repurchase Obligations
PNC’s repurchase obligations also include certain brokered
home equity loans/lines of credit that were sold to a limited
number of private investors in the financial services industry
by National City prior to our acquisition of National City.
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 loans sold
in these transactions. Repurchase activity associated with
brokered home equity loans/lines of credit is reported in the
Non-Strategic Assets Portfolio segment.
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 based on management evaluation. These adjustments
are recognized in Other noninterest income on the
Consolidated Income Statement.
The PNC Financial Services Group, Inc. – Form 10-K 207