Bank of America 2011 Annual Report Download - page 206

204 Bank of America 2011
Estimated Range of Possible Loss
Government-sponsored Enterprises
The Corporation’s estimated provision and liability at December
31, 2011, for obligations under representations and warranties
given to the GSEs considers, among other things, and is
necessarily dependent on and limited by, its historical claims
experience with the GSEs. It includes the Corporation’s
understanding of its agreements with the GSEs and projections
of future defaults as well as certain other assumptions and
judgmental factors. The Corporation’s estimate of the liability for
these obligations has been accounted for in the recorded liability
for representations and warranties for these loans. In recent
periods, the Corporation has been experiencing elevated levels of
new claims from the GSEs, including claims on loans on which
borrowers have made a significant number of payments (e.g., at
least 25 payments) or on loans which had defaulted more than
18 months prior to the repurchase request, in each case in
numbers that were not expected based on historical experience.
The criteria by which the GSEs are ultimately willing to resolve
claims have changed in ways that are unfavorable to the
Corporation. While the Corporation is seeking to resolve its
differences with the GSEs concerning each party’s interpretation
of the requirements of the governing contracts, whether it will be
able to achieve a resolution of these differences on acceptable
terms and timing thereof, is subject to significant uncertainty. The
Corporation intends repurchase loans to the extent required under
the contracts and standards that govern its relationships with the
GSEs.
The Corporation is not able to predict changes in the behavior
of the GSEs based on the Corporation’s past experiences.
Therefore, it is not possible to reasonably estimate a possible loss
or range of possible loss with respect to any such potential impact
in excess of current accrued liabilities.
Counterparties other than Government-sponsored
Enterprises
The population of private-label securitizations included in the BNY
Mellon Settlement encompasses almost all legacy Countrywide
first-lien private-label securitizations including loans originated
principally in the 2004 through 2008 vintage. For the remainder
of the population of private-label securitizations, the Corporation
believes it is probable that other claimants in certain types of
securitizations may come forward with claims that meet the
requirements of the terms of the securitizations. The Corporation
has seen an increased trend in requests for loan files from private-
label securitization trustees and an increase in repurchase claims
from private-label securitization trustees that meet required
standards. The Corporation believes that the provisions recorded
in connection with the BNY Mellon Settlement and the additional
non-GSE representations and warranties provisions recorded in
2011 have provided for a substantial portion of the Corporation’s
non-GSE representations and warranties exposures. However, it is
reasonably possible that future representations and warranties
losses may occur in excess of the amounts recorded for these
exposures. In addition, as discussed below, the Corporation has
not recorded any representations and warranties liability for certain
potential monoline exposures and certain potential whole-loan and
other private-label securitization exposures. The Corporation
currently estimates that the range of possible loss related to non-
GSE representations and warranties exposure as of December 31,
2011, could be up to $5 billion over existing accruals. This
estimated range of possible loss for non-GSE representations and
warranties does not represent a probable loss, and is based on
currently available information, significant judgment and a number
of assumptions, including those set forth below, that are subject
to change.
The methodology used to estimate the non-GSE
representations and warranties liability and the corresponding
range of possible loss considers a variety of factors including the
Corporation’s experience related to actual defaults, projected
future defaults, historical loss experience, estimated home prices
and other economic conditions. Among the factors that impact the
non-GSE representations and warranties liability and the
corresponding estimated range of possible loss are: (1)
contractual material adverse effect requirements, (2) the
representations and warranties provided and (3) the requirement
to meet certain presentation thresholds. The first factor is based
on the Corporation’s belief that a non-GSE contractual liability to
repurchase a loan generally arises only if the counterparties prove
there is a breach of representations and warranties that materially
and adversely affects the interest of the investor or all investors,
or of the monoline insurer or other financial guarantor (as
applicable), in a securitization trust and, accordingly, the
Corporation believes that the repurchase claimants must prove
that the alleged representations and warranties breach was the
cause of the loss. The second factor is related to the fact that
non-GSE securitizations include different types of representations
and warranties than those provided to the GSEs. The Corporation
believes the non-GSE securitizations’ representations and
warranties are less rigorous and actionable than the explicit
provisions of comparable agreements with the GSEs without regard
to any variations that may have arisen as a result of dealings with
the GSEs. The third factor is related to the fact that certain
presentation thresholds need to be met in order for any repurchase
claim to be asserted on the initiative of investors under the non-
GSE agreements. A securitization trustee may investigate or
demand repurchase on its own action, and most agreements
contain a threshold, for example 25 percent of the voting rights
per trust, that allows investors to declare a servicing event of
default under certain circumstances or to request certain action,
such as requesting loan files, that the trustee may choose to
accept and follow, exempt from liability, provided the trustee is
acting in good faith. If there is an uncured servicing event of default
and the trustee fails to bring suit during a 60-day period, then,
under most agreements, investors may file suit. In addition to this,
most agreements also allow investors to direct the securitization
trustee to investigate loan files or demand the repurchase of loans
if security holders hold a specified percentage, for example 25
percent, of the voting rights of each tranche of the outstanding
securities. Although the Corporation continues to believe that
presentation thresholds are a factor in the determination of
probable loss, given the BNY Mellon Settlement, the estimated
range of possible loss assumes that the presentation threshold
can be met for all of the non-GSE securitization transactions.
In addition, in the case of private-label securitizations, the
methodology used to estimate the non-GSE representations and
warranties liability and the corresponding range of possible loss
considers the implied repurchase experience based on the BNY
Mellon Settlement and assumes that the conditions to the BNY
Mellon Settlement are satisfied. Since the non-GSE transactions
that were included in the BNY Mellon Settlement differ from those
that were not included in the BNY Mellon Settlement, the
Corporation adjusted the experience implied in the settlement in