Wells Fargo 2015 Annual Report Download - page 88

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 (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
$1.6 trillion in the residential mortgage loan servicing portfolio
at December 31, 2015, 95% was current and less than 2% was
subprime at origination. Our combined delinquency and
foreclosure rate on this portfolio was 5.18% at December 31,
2015, compared with 5.79% at December 31, 2014. 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, 2015, was $62 million, representing 280 loans,
down from $183 million, or 839 loans, a year ago, as we
observed a decline in new demands and continued to work
through the outstanding demands and mortgage insurance
rescissions.
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 the 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 39 summarizes the changes in our mortgage
repurchase liability. We incurred net losses on repurchased
loans and investor reimbursements totaling $78 million in 2015,
compared with $144 million in 2014.
Table 39: Changes in Mortgage Repurchase Liability
Quarter ended
Dec 31, Sep 30, Jun 30, Mar 31, Year ended Dec. 31,
(in millions) 2015 2015 2015 2015 2015 2014 2013
Balance, beginning of period $ 538 557 586 615 615 899 2,206
Provision for repurchase losses:
Loan sales 9 11 13 10 43 44 143
Change in estimate (1) (128) (17) (31) (26) (202) (184) 285
Total additions (reductions) (119) (6) (18) (16) (159) (140) 428
Losses (2) (41) (13) (11) (13) (78) (144) (1,735)
Balance, end of period $ 378 538 557 586 378 615 899
(1) Results from changes in investor demand and mortgage insurer practices, credit deterioration and changes in the financial stability of correspondent lenders.
(2) Year ended December 31, 2013, reflects $746 million as a result of the agreement with FHLMC that resolves substantially all repurchase liabilities related to loans sold to
FHLMC prior to January 1, 2009. Year ended December 31, 2013, reflects $508 million as a result of the agreement with FNMA that resolves substantially all repurchase
liabilities related to loans sold to FNMA that were originated prior to January 1, 2009.
Wells Fargo & Company
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