Wells Fargo 2011 Annual Report Download - page 72

Risk Management — Credit Risk Management (continued)
LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES
We
sell residential mortgage loans to various parties, including (1)
government-sponsored entities Freddie Mac and Fannie Mae
(GSEs) who include the mortgage loans in GSE-guaranteed
mortgage securitizations, (2) SPEs that issue private label MBS,
and (3) other financial institutions that purchase mortgage loans
for investment or private label securitization. In addition, we
pool FHA-insured and VA-guaranteed mortgage loans that back
securities guaranteed by GNMA. We may be required to
repurchase these mortgage loans, indemnify the securitization
trust, investor or insurer, or reimburse the securitization trust,
investor or insurer for credit losses incurred on loans
(collectively “repurchase”) in the event of a breach of contractual
representations or warranties that is not remedied within a
period (usually 90 days or less) after we receive notice of the
breach.
We have established a mortgage repurchase liability related
to various representations and warranties that reflect
management’s estimate of losses for loans for which we have a
repurchase obligation, whether or not we currently service those
loans, based on a combination of factors. Our mortgage
repurchase liability estimation process also incorporates a
forecast for repurchase demands associated with mortgage
insurance rescission activity. Currently, repurchase demands
primarily relate to 2006 through 2008 vintages and to GSE-
guaranteed MBS.
During 2011, we continued to experience elevated levels of
repurchase activity measured by the number of investor
repurchase demands and our level of repurchases. We
repurchased or reimbursed investors for incurred losses on
mortgage loans with original balances of $2.8 billion in 2011,
compared with $2.6 billion in 2010. Additionally, we negotiated
settlements on pools of mortgage loans with original sold
balances of $341 million in 2011, compared with $675 million in
2010, to eliminate the risk of repurchase on these loans. We
incurred net losses on repurchased loans, investor
reimbursements and loan pool global settlements totaling
$1.2 billion in 2011, compared with $1.4 billion in 2010.
Table 37 provides the number of unresolved repurchase
demands and mortgage insurance rescissions. We do not
typically receive repurchase requests from GNMA, FHA/HUD or
VA. As an originator of an FHA insured or VA guaranteed loan,
we are responsible for obtaining the insurance with FHA or the
guarantee with the VA. To the extent we are not able to obtain
the insurance or the guarantee we must request to repurchase
the loan from the GNMA pool. Such repurchases from GNMA
pools typically represent a self-initiated process upon discovery
of the uninsurable loan (usually within 180 days from funding of
the loan). Alternatively, in lieu of repurchasing loans from
GNMA pools, we may be asked by the FHA/HUD or the VA to
indemnify them (as applicable) for defects found in the Post
Endorsement Technical Review process or audits performed by
FHA/HUD or the VA. Our liability for mortgage loan repurchase
losses incorporates probable losses associated with such
indemnification.
Table 37: Unresolved Repurchase Demands and Mortgage Insurance Rescissions
Government
Mortgage insurance
sponsored entities (1)
Private
rescissions with no demand (2)
Total
Number of
Original loan
Number of
Original loan
Number of
Original loan
Number of
Original loan
($ in millions)
loans
balance (3)
loans
balance (3)
loans
balance (3)
loans
balance (3)
2011
December 31,
7,066
$
1,575
470
$
167
1,178
$
268
8,714
$
2,010
September 30,
6,577
1,500
582
208
1,508
314
8,667
2,022
June 30,
6,876
1,565
695
230
2,019
444
9,590
2,239
March 31,
6,210
1,395
1,973
424
2,885
674
11,068
2,493
2010
December 31,
6,501
1,467
2,899
680
3,248
801
12,648
2,948
September 30,
9,887
2,212
3,605
882
3,035
748
16,527
3,842
June 30,
12,536
2,840
3,160
707
2,979
760
18,675
4,307
March 31,
10,804
2,499
2,320
519
2,843
737
15,967
3,755
(1)
Includes repurchase demands of 861 and $161 million, 878 and $173 million, 892 and $179 million, 685 and $132 million, 1,495 and $291 million, 2,263 and $437 million,
2,141 and $417 million, and 1,824 and $372 million for December 31, September 30, June 30 and March 31, 2011 and 2010, respec
tively, received from investors on
mortgage servicing rights acquired from other originators. We generally have the right of recourse against the seller and may
be able to recover losses related to such
repurchase demands subject to counterparty risk associated with the seller.
(2)
As part of our representations and warranties in our loan sales contracts, we typically represent to GSEs and private investors that certain loans have mortgage insurance to
the extent there are loans that have loan to value ratios in excess of 80
% that require mortgage insurance. To the extent the mortgage insurance is rescinded by the
mortgage insurer due to a claim of breach of a contractual representation or warranty, the lack of insurance may result in a
repurchase demand from an investor. Sim
ilar to
repurchase demands, we evaluate mortgage insurance rescission notices for validity and appeal for reinstatement if the rescis
sion was not based on a contractual breach.
When investor demands are received due to lack of mortgage insurance, they are reported as unresolved repurchase demands based on the applicable investor category for
the loan (GSE or private). Over the last year, approximately 20% of our repurchase demands from GSEs had mortgage insurance r
escission as one of the reasons for the
rep
urchase demand. Of all the mortgage insurance rescissions notices received in 2010, approximately 70% have resulted in repurc
hase demands through December 2011.
Not all mortgage insurance rescissions received in 2010 have been completed through the appeals
process with the mortgage insurer and upon successful appeal, we work
with the investor to rescind the repurchase demand.
(3)
While the original loan balances related to these demands are presented above, the establishment of the repurchase liability is based on a combination of factors, such as
our appeals success rates, reimbursement by correspondent and other third
-party originators, and projected loss severity, which is driven by the difference between the
current loan balance and the estimated collateral value less costs to sell the property.
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