Fifth Third Bank 2013 Annual Report Download - page 86

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
84 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 17 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.
During the fourth quarter of 2013, the Bancorp settled certain
repurchase claims related to mortgage loans originated and sold to
FHLMC prior to January 1, 2009 for $25 million after paid claim
credits and other adjustments. The settlement removes the
Bancorp’s responsibility to repurchase or indemnify FHLMC for
representation and warranty violations on any loan sold prior to
January 1, 2009 except in limited circumstances.
As of December 31, 2013 and 2012, the Bancorp maintained
reserves related to loans sold with representation and warranty
recourse provisions totaling $44 million and $110 million,
respectively, included in other liabilities in the Bancorp’s
Consolidated Balance Sheets.
During 2013 and 2012, the Bancorp paid $64 million and $34
million, respectively, in the form of make whole payments and
repurchased $89 million and $114 million, respectively, in
outstanding principal of loans to satisfy investor demands. Total
repurchase demand requests during 2013 and 2012 were $263
million and $340 million, respectively. Total outstanding repurchase
demand inventory was $46 million at December 31, 2013 compared
to $67 million at December 31, 2012.
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, 2013, the
outstanding balances on these loans sold with credit recourse was
$579 million compared to $662 million at December 31, 2012. The
Bancorp maintained an estimated credit loss reserve on these loans
sold with credit recourse of $16 million and $20 million at
December 31, 2013 and 2012, 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 $37
million at December 31, 2013 and $58 million at December 31,
2012. The Bancorp maintained a reserve, included in other liabilities
in the Bancorp’s Consolidated Balance Sheets, related to exposures
within the reinsurance portfolio of $10 million as of December 31,
2013 and $18 million as of December 31, 2012. 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.
Automobile Loan Securitization
In March of 2013, the Bancorp recognized an immaterial loss on the
securitization and sale of certain automobile loans with a carrying
amount of approximately $509 million. The Bancorp utilized a
securitization trust to facilitate the securitization process. The trust
issued asset-backed securities in the form of notes and equity
certificates, with varying levels of credit subordination and payment
priority. The Bancorp does not hold any of the notes or equity
certificates issued by the trust, and the investors in these securities
have no credit recourse to the Bancorp’s assets for failure of debtors
to pay when due. As part of the sale, the Bancorp obtained servicing
responsibilities and recognized a servicing asset with an initial fair
value of $6 million. For further information on this automobile
securitization, see Notes 10 and 11 of the Notes to Consolidated
Financial Statements.