Wells Fargo 2014 Annual Report Download - page 85

LIABILITY FOR MORTGAGE LOAN REPURCHASE LOSSES
We sell residential mortgage loans to various parties, including
(1) government-sponsored entities (GSEs) Federal Home Loan
Mortgage Corporation (FHLMC) and Federal National Mortgage
Association (FNMA) 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 are then used to back securities guaranteed by the
Government National Mortgage Association (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. The majority of repurchase demands are on loans
that default in the first 24 to 36 months following origination of
the mortgage loan.
In connection with our sales and securitization of residential
mortgage loans to various parties, we have established a
mortgage repurchase liability, initially at fair value, related to
various representations and warranties that reflect
management’s estimate of losses for loans for which we could
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 of repurchase demands associated with
mortgage insurance rescission activity.
Because we retain the servicing for most of the mortgage
loans we sell or securitize, we believe the quality of our
residential mortgage loan servicing portfolio provides helpful
information in evaluating our repurchase liability. Of the
$1.8 trillion in the residential mortgage loan servicing portfolio
at December 31, 2014, 94% was current and less than 2% was
subprime at origination. Our combined delinquency and
foreclosure rate on this portfolio was 5.79% at
December 31, 2014, compared with 6.40% at December 31, 2013.
Three percent of this portfolio is private label securitizations for
which we originated the loans and therefore have some
repurchase risk.
The overall level of unresolved repurchase demands and
mortgage insurance rescissions outstanding at
December 31, 2014, was down from a year ago both in number of
outstanding loans and in total dollar balances as we continued to
work through the new demands and mortgage insurance
rescissions and as we announced settlements with both Federal
Home Loan Mortgage Corporation (FHLMC) and Federal
National Mortgage Association (FNMA) in 2013, that resolved
substantially all repurchase liabilities associated with loans sold
to FHLMC prior to January 1, 2009, and loans sold to FNMA
that were originated prior to January 1, 2009. Demands from
private investors declined from December 31, 2013 primarily due
to settlements with two private investors in first quarter 2014
that resolved many of the increased demands we experienced
commencing in 2012 and significantly in fourth quarter 2013.
Customary with industry practice, we have the right of
recourse against correspondent lenders from whom we have
purchased loans with respect to representations and warranties.
Historical recovery rates as well as projected lender performance
are incorporated in the establishment of our mortgage
repurchase liability.
We do not typically receive repurchase requests from
GNMA, FHA and the Department of Housing and Urban
Development (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 permission 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
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. The Post
Endorsement Technical Review is a process whereby HUD
performs underwriting audits of closed/insured FHA loans for
potential deficiencies. Our liability for mortgage loan repurchase
losses incorporates probable losses associated with such
indemnification.
Table 41 provides the number of unresolved repurchase
demands and mortgage insurance rescissions.
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