Wells Fargo 2011 Annual Report Download - page 74

Risk Management — Credit Risk Management (continued)
Table 38: Changes in Mortgage Repurchase Liability
Quarter ended
Dec. 31,
Sept. 30,
June 30,
Mar. 31,
Year ended Dec. 31,
(in millions)
2011
2011
2011
2011
2011
2010
Balance, beginning of period
$
1,194
1,188
1,207
1,289
1,289
1,033
Provision for repurchase losses:
Loan sales
27
19
20
35
101
144
Change in estimate (1)
377
371
222
214
1,184
1,474
Total additions
404
390
242
249
1,285
1,618
Losses
(272)
(384)
(261)
(331)
(1,248)
(1,362)
Balance, end of period
$
1,326
1,194
1,188
1,207
1,326
1,289
(1)
Results from such factors as credit deterioration, changes in investor demand and mortgage insurer practices, and changes in the financial stability of correspondent lenders.
The mortgage repurchase liability of $1.3 billion at
December 31, 2011, represents our best estimate of the probable
loss that we may incur for various representations and
warranties in the contractual provisions of our sales of mortgage
loans. Because the level of mortgage loan repurchase losses
depends upon economic factors, investor demand strategies and
other external conditions that may change over the life of the
underlying loans, the level of the liability for mortgage loan
repurchase losses is difficult to estimate and requires
considerable management judgment. We maintain regular
contact with the GSEs and other significant investors to monitor
and address their repurchase demand practices and concerns.
Because of the uncertainty in the various estimates underlying
the mortgage repurchase liability, there is a range of losses in
excess of the recorded mortgage repurchase liability that are
reasonably possible. The estimate of the range of possible loss
for representations and warranties does not represent a probable
loss, and is based on currently available information, significant
judgment, and a number of assumptions that are subject to
change. The high end of this range of reasonably possible losses
in excess of our recorded liability was $2.1 billion at
December 31, 2011, and was determined based upon modifying
the assumptions utilized in our best estimate of probable loss to
reflect what we believe to be the high end of reasonably possible
adverse assumptions. For additional information on our
repurchase liability, see the “Critical Accounting Policies –
Liability for Mortgage Loan Repurchase Losses” section and
Note 9 (Mortgage Banking Activities) to Financial Statements in
this Report.
The repurchase liability is predominantly applicable to loans
we originated and sold with representations and warranties.
Most of these loans are included in our servicing portfolio. Our
repurchase liability estimate involves consideration of many
factors that influence the key assumptions of what our
repurchase volume may be and what loss on average we may
incur. Those key assumptions and the sensitivity of the liability
to immediate adverse changes in them at December 31, 2011, are
presented in Table 39. For additional information about the
range of loss that is reasonably possible in excess of the recorded
mortgage repurchase liability, see Note 9 (Mortgage Banking
Activities) to Financial Statements in this Report.
Table
39: Mortgage Repurchase Liability –
Sensitivity/Assumptions
Mortgage
repurchase
(in millions)
liability
Balance at December 31, 2011
$
1,326
Loss on repurchases (1)
40.0
%
Increase in liability from:
10% higher losses
$
133
25% higher losses
333
Repurchase rate assumption
0.3
%
Increase in liability from:
10% higher repurchase rates
$
122
25% higher repurchase rates
304
(1)
Represents total estimated average loss rate on repurchased loans, net of
recovery from third party originators, based on historical experience and
current economic conditions.
The average loss rate includes the impact of
repurchased loans for which no loss is expected to be realized.
To the extent that economic conditions and the housing
market do not improve or future investor repurchase demands
and appeals success rates differ from past experience, we could
continue to have increased demands and increased loss severity
on repurchases, causing future additions to the repurchase
liability. However, some of the underwriting standards that were
permitted by the GSEs for conforming loans in the 2006 through
2008 vintages, which significantly contributed to recent levels of
repurchase demands, were tightened starting in mid to late
2008. Accordingly, we do not expect a similar rate of repurchase
requests from the 2009 and prospective vintages, absent
deterioration in economic conditions or changes in investor
behavior.
In October 2011, the Arizona Department of Insurance
assumed full and exclusive power of management and control of
PMI Mortgage Insurance Co. (PMI) and announced that PMI
will pay 50% of claim amounts in cash, with the rest deferred. In
November 2011, PMI’s parent company, PMI Group Inc., filed
for Chapter 11 bankruptcy. Wells Fargo has previously utilized
PMI to provide mortgage insurance on certain loans originated
and held in our portfolio. Additionally, PMI has provided
mortgage insurance on loans originated and sold to third-party
investors. For loans sold to third-party investors, there is no
additional risk of repurchase loss to Wells Fargo associated with
the deferred insurance claim amounts from PMI since this credit
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