PNC Bank 2015 Annual Report Download - page 86

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. 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 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), 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 20 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”); (v) the
availability of legal defenses; and (vi) the estimated severity
of loss upon repurchase of the loan or collateral, make-whole
settlement or indemnification.
We previously reached agreements with both FNMA and
FHLMC to resolve their repurchase claims with respect to
loans sold between 2000 and 2008. Thus, our repurchase
obligations involve Agency securitizations and other loan
sales with FNMA and FHLMC subsequent to 2008 only, as
well as Agency securitizations with GNMA and Non-Agency
securitizations and other loan sales with private investors. The
unpaid principal balance of loans associated with our exposure
to repurchase obligations totaled $65.3 billion at
December 31, 2015, of which $1.2 billion was 90 days or
more delinquent. The comparative amounts were $68.3 billion
and $1.5 billion, respectively, at December 31, 2014.
We believe our indemnification and repurchase liability
appropriately reflects the estimated probable losses on
indemnification and repurchase claims for all residential
mortgage loans sold and outstanding as of December 31, 2015
and December 31, 2014. In making these estimates we
consider the losses that we expect to incur over the life of the
sold loans. See Note 21 Commitments and Guarantees in this
Report for additional information on residential mortgage
repurchase obligations.
Home Equity Loan/Line of Credit Repurchase Obligations
PNC’s repurchase obligations include obligations with respect
to 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 the
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.
Loan covenants and representations and warranties were
established through loan sale agreements with various
investors to provide assurance that loans PNC sold to the
investors were 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.
Investor indemnification or repurchase claims are typically
settled on an individual loan basis through make-whole
68 The PNC Financial Services Group, Inc. – Form 10-K