Fifth Third Bank 2012 Annual Report Download - page 81

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
79 Fifth Third Bancorp
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, the Bancorp enters into financial
transactions to extend credit and various forms of commitments
and guarantees that may be considered off-balance sheet
arrangements. These transactions involve varying elements of
market, credit and liquidity risk. Refer to Note 16 of the Notes to
Consolidated Financial Statements for additional information. A
discussion of these transactions is as follows:
Residential Mortgage Loan Sales
Conforming residential mortgage loans sold to unrelated third
parties are generally sold with representation and warranty recourse
provisions. Such provisions include the loan’s compliance with
applicable loan criteria, including certain documentation standards
per agreements with unrelated third parties. Additional reasons for
the Bancorp having to repurchase the loans include compliance with
collateral appraisal standards, fraud related to the loan application
and the rescission of mortgage insurance. Under these provisions,
the Bancorp is required to repurchase any previously sold loan for
which the representation or warranty of the Bancorp proves to be
inaccurate, incomplete or misleading. As of December 31, 2012 and
2011, the Bancorp maintained reserves related to these loans sold
with representation and warranty recourse provisions totaling $110
million and $55 million, respectively, included in other liabilities in
the Bancorp’s Consolidated Balance Sheets. During the third and
fourth quarters of 2012, the Bancorp received additional
information from FHLMC regarding their file selection criteria. As
a result of these communications, the Bancorp was able to better
estimate the probable losses on certain loans sold to FHLMC which
was the primary driver in the increase in the representation and
warranty reserve from December 31, 2011 to December 31, 2012.
During 2012 and 2011, the Bancorp paid $34 million and $63
million, respectively, in the form of make whole payments and
repurchased $114 million and $122 million, respectively, in
outstanding principal of loans to satisfy investor demands. Total
repurchase demand requests during 2012 and 2011 were $340
million and $350 million, respectively. Total outstanding repurchase
demand inventory was $67 million at December 31, 2012 compared
to $66 million at December 31, 2011.
The Bancorp sold certain residential mortgage loans in the
secondary market with credit recourse. In the event of any customer
default, pursuant to the credit recourse provided, the Bancorp is
required to reimburse the third party. The maximum amount of
credit risk in the event of nonperformance by the underlying
borrowers is equivalent to the total outstanding balance. In the
event of nonperformance, the Bancorp has rights to the underlying
collateral value securing the loan. At December 31, 2012, the
outstanding balances on these loans sold with credit recourse was
$662 million compared to $772 million at December 31, 2011. The
Bancorp maintained an estimated credit loss reserve on these loans
sold with credit recourse of $20 million and $17 million at
December 31, 2012 and 2011, respectively, included in other
liabilities in the Consolidated Balance Sheets. To determine the
credit loss reserve, the Bancorp used an approach that is consistent
with its overall approach in estimating credit losses for various
categories of residential mortgage loans held in its loan portfolio.
Private Mortgage Insurance
For certain mortgage loans originated by the Bancorp, borrowers
may be required to obtain PMI provided by third-party insurers. In
some instances, these insurers cede a portion of the PMI premiums
to the Bancorp, and the Bancorp provides reinsurance coverage
within a specified range of the total PMI coverage. The Bancorp’s
reinsurance coverage typically ranges from 5% to 10% of the total
PMI coverage.
The Bancorp’s maximum exposure in the event of
nonperformance by the underlying borrowers is equivalent to the
Bancorp's total outstanding reinsurance coverage, which was $58
million at December 31, 2012 and $77 million at December 31,
2011. The Bancorp maintained a reserve, included in other liabilities
in the Bancorp’s Consolidated Balance Sheets, related to exposures
within the reinsurance portfolio of $18 million as of December 31,
2012 and $27 million as of December 31, 2011. In 2009, the
Bancorp suspended the practice of providing reinsurance of private
mortgage insurance for newly originated mortgage loans. In the
second quarter of 2011, the Bancorp allowed one of its third-party
insurers to terminate its reinsurance agreement with the Bancorp,
resulting in the Bancorp releasing collateral to the insurer in the
form of investment securities and other assets with a carrying value
of $5 million, and the insurer assuming the Bancorp’s obligations
under the reinsurance agreement, resulting in a decrease to the
Bancorp’s reserve liability of $11 million and decrease in the
Bancorp’s maximum exposure of $27 million. In the fourth quarter
of 2012, the Bancorp allowed one of its third-party insurers to
terminate its reinsurance agreement with the Bancorp, resulting in
the insurer assuming the Bancorp’s obligations under the
reinsurance agreement, resulting in a decrease to the Bancorp’s
reserve liability of $2 million and decrease in the Bancorp’s
maximum exposure of $3 million.