Bank of America 2010 Annual Report Download - page 39

Recent Events
Representations and Warranties Liability
On December 31, 2010, we reached agreements with Freddie Mac (FHLMC)
and Fannie Mae (FNMA), collectively the GSEs, where the Corporation paid
$2.8 billion to resolve repurchase claims involving first-lien residential mort-
gage loans sold directly to the GSEs by entities related to legacy Countrywide
(Countrywide). The agreement with FHLMC extinguishes all outstanding and
potential mortgage repurchase and make-whole claims arising out of any
alleged breaches of selling representations and warranties related to loans
sold directly by legacy Countrywide to FHLMC through 2008, subject to certain
exceptions we do not believe will be material. The agreement with FNMA
substantially resolves the existing pipeline of repurchase and make-whole
claims outstanding as of September 20, 2010 arising out of alleged breaches
of selling representations and warranties related to loans sold directly by
legacy Countrywide to FNMA. These agreements with the GSEs do not cover
outstanding and potential mortgage repurchase and make-whole claims
arising out of any alleged breaches of selling representations and warranties
to legacy Bank of America first-lien residential mortgage loans sold directly to
the GSEs or other loans sold directly to the GSEs other than described above,
loan servicing obligations, other contractual obligations or loans contained in
private-label securitizations.
As a result of these agreements and associated adjustments made to the
representations and warranties liability for other loans sold directly to the GSEs
and not covered by the agreements, the Corporation recorded a provision of
$3.0 billion during the fourth quarter of 2010. We believe that our remaining
exposure to representations and warranties for first-lien residential mortgage
loans sold directly to the GSEs has been accounted for as a result of these
agreements and the associated adjustments to our recorded liability for rep-
resentations and warranties for first-lien residential mortgage for loans sold
directly to the GSEs and not covered by the agreements as discussed above. We
believe our predictive repurchase models, utilizing our historical repurchase
experience with the GSEs while considering current developments, including the
recent agreements, projections of future defaults as well as certain assump-
tions regarding economic conditions, home prices and other matters, allows us
to reasonably estimate the liability for obligations under representations and
warranties on loans sold to the GSEs. However, future provisions for represen-
tations and warranties liability to the GSEs may be affected if actual experience
is different from our historical experience with the GSEs or our projections of
future defaults, and assumptions regarding economic conditions, home prices
and other matters, that are incorporated in the provision calculation.
Although our experience with non-GSE claims remains limited, we expect
additional activity in this area going forward and that the volume of repurchase
claims from monolines, whole-loan investors and investors in private-label
securitizations could increase in the future. It is reasonably possible that future
losses may occur, and our estimate is that the upper range of possible loss
related to non-GSE sales could be $7 billion to $10 billion over existing accruals.
This estimate does not represent a probable loss, is based on currently
available information, significant judgment, and a number of assumptions that
are subject to change. A significant portion of this estimate relates to loans
originated through legacy Countrywide, and the repurchase liability is generally
limited to the original seller of the loan. Future provisions and possible loss or
range of loss may be impacted if actual results are different from our assump-
tions regarding economic conditions, home prices and other matters and may
vary by counterparty. The resolution of the repurchase claims process with the
non-GSE counterparties will likely be a protracted process, and we will vigorously
contest any request for repurchase if we conclude that a valid basis for the
repurchase claim does not exist. For additional information about representa-
tions and warranties, see Note 9 – Representations and Warranties Obligations
and Corporate Guarantees to the Consolidated Financial Statements and
Representations and Warranties beginning on page 56.
Goodwill
In 2010, we recorded a $10.4 billion goodwill impairment charge in Global
Card Services and a $2.0 billion goodwill impairment charge in Home Loans &
Insurance. These goodwill impairment charges are non-cash, non-tax deduct-
ible and have no impact on our reported Tier 1 and tangible equity ratios. Our
consumer and small business card products, including the debit card busi-
ness, are part of an integrated platform within Global Card Services.Basedon
the provisions of the Financial Reform Act which limit the interchange fees that
may be charged with respect to electronic debit interchange, we estimate a
revenue loss, beginning in the third quarter of 2011, of approximately
$2.0 billion annually based on current volumes and assuming limited miti-
gation within this segment. Accordingly, we performed a goodwill impairment
analysis during the three months ended September 30, 2010. This analysis
indicated that the implied fair value of the goodwill in Global Card Services
was less than the carrying value, and accordingly, we recorded a $10.4 billion
charge to reduce the carrying value to fair value.
During the three months ended December 31, 2010, we performed a
goodwill impairment analysis for Home Loans & Insurance as it was likely that
there had been a decline in its fair value as a result of increased uncertainties,
including existing and potential litigation exposure and other related risks,
higher servicing costs including loss mitigation efforts, foreclosure related
issues and the redeployment of centralized sales resources to address
servicing needs. This analysis indicated that the implied fair value of the
goodwill in Home Loans & Insurance was less than the carrying value, and
accordingly, we recorded a $2 billion charge to reduce the carrying value of
goodwill in Home Loans & Insurance.
For additional information on the goodwill impairment charges, see Com-
plex Accounting Estimates — Goodwill and Intangible Assets beginning on
page 114 and Note 10 — Goodwill and Intangible Assets to the Consolidated
Financial Statements.
Review of Foreclosure Processes
On October 1, 2010, we voluntarily stopped taking residential mortgage
foreclosure proceedings to judgment in states where foreclosure requires
a court order following a legal proceeding (judicial states). On October 8,
2010, we stopped foreclosure sales in all states in order to complete an
assessment of the related business processes. These actions generally did
not affect the initiation and processing of foreclosures prior to judgment, or
sale of vacant real estate owned properties. We took these precautionary
steps in order to ensure our processes for handling foreclosures include the
appropriate controls and quality assurance. Our review has involved an
assessment of the foreclosure process, including a review of completed
foreclosure affidavits in pending proceedings.
As a result of that review, we identified and implemented process and
control enhancements, and we intend to monitor ongoing quality results of
each process. The process and control enhancements implemented as a
result of our review are intended to strengthen the controls related to prep-
aration, execution and notarization of affidavits in judicial states and
strengthen our oversight of lawyers in the attorney network who conduct
foreclosure proceedings on our behalf, both in judicial states and in states
where foreclosures are handled without judicial supervision (non-judicial
states). This oversight includes a periodic review of a sample of foreclosure
files maintained by these attorneys, and on-site reviews of law firms in the
attorney network. In addition, our process and control enhancements for both
judicial and non-judicial states include strengthening the controls related to the
preparation and execution of other foreclosure loan documentation, including
notices of default and pre-foreclosure loss mitigation affidavits, as well as
enhanced associate training. After these enhancements were put in place, we
resumed foreclosure sales in most non-judicial states during the fourth quarter
of 2010, and expect sales to resume in the remaining non-judicial states in the
Bank of America 2010 37