Wells Fargo 2011 Annual Report Download - page 75

risk is owned by the investor in the loan. We also hold a small
amount of residential mortgage-backed securities, which are
backed by mortgages with a limited amount of insurance
provided by PMI. Because the loans and securities held in our
portfolios with PMI insurance support are limited in amount, we
do not anticipate the deferred claim payments will result in a
material adverse effect on our consolidated financial statements.
RISKS RELATING TO SERVICING ACTIVITIES In addition to
servicing loans in our portfolio, we act as servicer and/or master
servicer of residential mortgage loans included in GSE-
guaranteed mortgage securitizations, FHA/VA/GNMA-
guaranteed mortgage securitizations and private label mortgage
securitizations, as well as for unsecuritized loans owned by
institutional investors. The following discussion summarizes the
primary duties and requirements of servicing and related recent
industry developments.
General Servicing Duties and Requirements
The loans we service were originated by us or by other mortgage
loan originators. As servicer, our primary duties are typically to
(1) collect payments due from borrowers, (2) advance certain
delinquent payments of principal and interest, (3) maintain and
administer any hazard, title or primary mortgage insurance
policies relating to the mortgage loans, (4) maintain any
required escrow accounts for payment of taxes and insurance
and administer escrow payments, (5) foreclose on defaulted
mortgage loans or, to the extent consistent with the documents
governing a securitization, consider alternatives to foreclosure,
such as loan modifications or short sales, and (6) for loans sold
into private label securitizations, manage the foreclosed property
through liquidation. As master servicer, our primary duties are
typically to (1) supervise, monitor and oversee the servicing of
the mortgage loans by the servicer, (2) consult with each servicer
and use reasonable efforts to cause the servicer to observe its
servicing obligations, (3) prepare monthly distribution
statements to security holders and, if required by the
securitization documents, certain periodic reports required to be
filed with the SEC, (4) if required by the securitization
documents, calculate distributions and loss allocations on the
mortgage-backed securities, (5) prepare tax and information
returns of the securitization trust, and (6) advance amounts
required by non-affiliated servicers who fail to perform their
advancing obligations.
Each agreement under which we act as servicer or master
servicer generally specifies a standard of responsibility for
actions we take in such capacity and provides protection against
expenses and liabilities we incur when acting in compliance with
the specified standard. For example, most private label
securitization agreements under which we act as servicer or
master servicer typically provide that the servicer and the master
servicer are entitled to indemnification by the securitization
trust for taking action or refraining from taking action in good
faith or for errors in judgment. However, we are not
indemnified, but rather are required to indemnify the
securitization trustee, against any failure by us, as servicer or
master servicer, to perform our servicing obligations or against
any of our acts or omissions that involve wilful misfeasance, bad
faith or gross negligence in the performance of, or reckless
disregard of, our duties. In addition, if we commit a material
breach of our obligations as servicer or master servicer, we may
be subject to termination if the breach is not cured within a
specified period following notice, which can generally be given
by the securitization trustee or a specified percentage of security
holders. Whole loan sale contracts under which we act as
servicer generally include similar provisions with respect to our
actions as servicer. The standards governing servicing in GSE-
guaranteed securitizations, and the possible remedies for
violations of such standards, vary, and those standards and
remedies are determined by servicing guides maintained by the
GSEs, contracts between the GSEs and individual servicers and
topical guides published by the GSEs from time to time. Such
remedies could include indemnification or repurchase of an
affected mortgage loan.
Foreclosure and Securitization Matters
During fourth quarter 2010, we identified practices where the
final steps relating to the execution of foreclosure affidavits, as
well as some aspects of the notarization process were not
adhered to. Any re-execution or redelivery of any documents in
connection with foreclosures will involve costs that may not be
legally or otherwise reimbursable to us to the extent they relate
to securitized mortgage loans. Further, if the validity of any
foreclosure action is challenged by a borrower, whether
successfully or not, we may incur significant litigation costs,
which may not be reimbursable to us to the extent they relate to
securitized mortgage loans. In addition, if a court were to
overturn a foreclosure due to errors or deficiencies in the
foreclosure process, we may have liability to the borrower if the
required process was not followed and such failure resulted in
damages to the borrower. We could also have liability to a title
insurer that insured the title to the property sold in foreclosure.
Any such liabilities may not be reimbursable to us to the extent
they relate to a securitized mortgage loan.
When we securitize mortgage loans we have an obligation to
deliver mortgage notes, assignments and other critical
documents. Although we continue to believe that we delivered all
documents in accordance with the requirements of each
securitization involving our mortgage loans, if any required
document with respect to a securitized mortgage loan sold by us
is missing or materially defective, we would be obligated to cure
the defect or to repurchase the loan.
To facilitate securitizations it is a common industry practice
to record mortgages in the name of Mortgage Electronic
Registration Systems, Inc. (MERS). Attorneys general of most
states have alleged that this common industry practice creates
issues regarding whether a securitization trust has good title to
the mortgage loan. MERS is a company that acts as mortgagee of
record and as nominee for the owner of the related mortgage
note. When mortgages are assigned, such as between an
originator and a securitization trust, the change is recorded
electronically on a register maintained by MERS. The purpose of
MERS is to save borrowers and lenders from having to record
assignments of mortgages in county land offices each time
ownership of the mortgage note is assigned. Although MERS has
been in existence and used for many years, it has recently been
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