Bank of America 2010 Annual Report Download - page 58

Representations and Warranties
We securitize first-lien residential mortgage loans generally in the form of MBS
guaranteed by GSEs or the Government National Mortgage Association
(GNMA) in the case of the Federal Housing Administration (FHA) insured
and U.S. Department of Veterans Affairs (VA) guaranteed mortgage loans. In
addition, in prior years, legacy companies and certain subsidiaries have sold
pools of first-lien residential mortgage loans and home equity loans as private-
label securitizations or in the form of whole loans. In connection with these
transactions, we or our subsidiaries or legacy companies make or have made
various representations and warranties. Breaches of these representations
and warranties may result in the requirement to repurchase mortgage loans or
to otherwise make whole or provide other remedy to a whole-loan buyer or
securitization trust (collectively, repurchase claims). Our operations are cur-
rently structured to attempt to limit the risk of repurchase and accompanying
credit exposure by seeking to ensure consistent production of mortgages in
accordance with our underwriting procedures and by servicing those mort-
gages consistent with our contractual obligations.
The fair value of probable losses to be absorbed under the representations
and warranties obligations and the guarantees is recorded as an accrued
liability when the loans are sold. The liability for probable losses is updated
by accruing a representations and warranties provision in mortgage banking
income. This is done throughout the life of the loan as necessary when
additional relevant information becomes available. The methodology used to
estimate the liability for representations and warranties is a function of the
representations and warranties given and considers a variety of factors, which
include, depending on the counterparty, actual defaults, estimated future de-
faults, historical loss experience, estimated home prices, estimated probability
that a repurchase request will be received, number of payments made by the
borrower prior to default and estimated probability that a loan will be required to
be repurchased. Historical experience also considers recent events such as the
agreements with the GSEs on December 31, 2010 as discussed in the following
section. Changes to any one of these factors could significantly impact the
estimate of our liability. Given that these factors vary by counterparty, we analyze
our representations and warranties obligations based on the specific counter-
party with whom the sale was made. Although the timing and volume has varied,
we have experienced in recent periods increasing repurchase and similar
requests from buyers and insurers, including monolines. Generally the volume
of unresolved repurchase claims from the FHA and VA for loans in GNMA-
guaranteed securities is not significant because the requests are limited in
number and are typically resolved quickly. We expect that efforts to attempt to
assert repurchase requests by monolines, whole-loan investors and private-
label securitization investors may increase in the future. See Recent Events –
Private-label Residential Mortgage-backed Securities Matters, on page 39 for
additional information. We perform a loan-by-loan review of all properly pre-
sented repurchase claims and have and will continue to contest such demands
that we do not believe are valid. In addition, we may reach a bulk settlement with
a counterparty (in lieu of the loan-by-loan review process), on terms determined
to be advantageous to the Corporation. Overall, disputes with respect to
repurchase claims have increased with monoline insurers, whole-loan buyers
and private-label securitization investors. For additional information, see
Note 9 – Representations and Warranties Obligations and Corporate Guaran-
tees to the Consolidated Financial Statements.
At December 31, 2010, our total unresolved repurchase claims totaled
approximately $10.7 billion compared to $7.6 billion at the end of 2009. The
liability for representations and warranties and corporate guarantees, is
included in accrued expenses and other liabilities and the related provision
is included in mortgage banking income. At December 31, 2010 and 2009,
the liability was $5.4 billion and $3.5 billion. For 2010 and 2009, the
provision for representations and warranties and corporate guarantees
was $6.8 billion and $1.9 billion. The representations and warranties provi-
sion of $6.8 billion, includes a provision of $3.0 billion in the fourth quarter of
2010 related to the GSE agreements as well as adjustments to the repre-
sentations and warranties liability for other loans sold directly to the GSEs and
not covered by those agreements. Also contributing to the increase in rep-
resentations and warranties provision for the year was our continued eval-
uation of exposure to non-GSE repurchases and similar claims, which led to
the determination that we have developed sufficient repurchase experience
with certain non-GSE counterparties to record a liability related to existing and
future projected claims from such counterparties. Representations and war-
ranties provision may vary significantly each period as the methodology used
to estimate the expense continues to be refined based on the level and type of
repurchase claims presented, defects identified, the latest experience gained
on repurchase claims and other relevant facts and circumstances, which
could have a material adverse impact on our earnings for any particular
period.
Government-sponsored Enterprises
During the last ten years, Bank of America and our subsidiaries have sold over
$2.0 trillion of loans to the GSEs and we have an established history of
working with them on repurchase claims. Our experience with them continues
to evolve and any disputes are generally related to areas such as the
reasonableness of stated income, occupancy and undisclosed liabilities,
and are typically focused on the 2004 through 2008 vintages. On Decem-
ber 31, 2010, we reached agreements with the GSEs and paid $2.8 billion to
the GSEs pursuant to such agreements, resolving repurchase claims involving
certain residential mortgage loans sold directly to them by entities related to
legacy Countrywide. As a result of these agreements, as well as adjustments
to the representations and warranties liability for other loans sold directly to
the GSEs and not covered by those agreements, we adjusted our liability for
representations and warranties. For additional information regarding these
agreements, see Note 9 – Representations and Warranties Obligations and
Corporate Guarantees to the Consolidated Financial Statements.
Our current repurchase claims experience with the GSEs is predominantly
concentrated in the 2004 through 2008 origination vintages where we believe
that our exposure to representations and warranties liability is most signif-
icant. Our repurchase claims experience related to loans originated prior to
2004 has not been significant and we believe that the changes made to our
operations and underwriting policies have reduced our exposure after 2008.
The cumulative repurchase claims for 2007 exceed all other vintages. The
volume of loans originated in 2007 was significantly higher than any other
vintage which, together with the high delinquency level in this vintage, helps to
explain the high level of repurchase claims compared to the other vintages.
56 Bank of America 2010