Bank of America 2012 Annual Report Download - page 214

212 Bank of America 2012
commutation or similar arrangement. As of December 31, 2012,
68 percent of the MI rescission notices the Corporation has
received have not yet been resolved. Of those not yet resolved,
46 percent are implicated by ongoing litigation where no loan-level
review is currently contemplated nor required to preserve the
Corporation’s legal rights. In this litigation, the litigating mortgage
insurance companies are also seeking bulk rescission of certain
policies, separate and apart from loan-by-loan denials or
rescissions. The Corporation is in the process of reviewing 37
percent of the remaining open MI rescission notices, and it has
reviewed and is contesting the MI rescission with respect to 63
percent of these remaining open MI rescission notices. Of the
remaining open MI rescission notices, 40 percent are also the
subject of ongoing litigation; although, at present, these MI
rescissions are being processed in a manner generally consistent
with those not affected by litigation.
In addition to the discussion above, the FNMA Settlement
resolved significant representations and warranties exposures
including unresolved and potential repurchase claims from FNMA
resulting solely from MI rescission notices relating to loans covered
by the FNMA Settlement. The Corporation’s pipeline of unresolved
repurchase claims from the GSEs resulting solely from MI
rescission notices increased to $2.3 billion at December 31, 2012
from $1.2 billion at December 31, 2011. The FNMA Settlement
resolved approximately $1.9 billion of such unresolved repurchase
claims. In 2011, FNMA issued an announcement requiring
servicers to report all MI rescission notices with respect to loans
sold to FNMA and confirmed FNMA’s view of its position that a
mortgage insurance company’s issuance of a MI rescission notice
in and of itself constitutes a breach of the lender’s representations
and warranties and permits FNMA to require the lender to
repurchase the mortgage loan or promptly remit a make-whole
payment covering FNMA’s loss even if the lender is contesting the
MI rescission notice. The Corporation had informed FNMA that it
did not believe that the new policy was valid under its contracts
with FNMA. The parties resolved this and other MI-related issues
as part of the FNMA Settlement, which clarified the parties’
obligations with respect to MI including establishing timeframes
for certain payments and other actions, setting parameters for
potential bulk settlements and providing for cooperation in future
dealings with mortgage insurers. As a result, the Corporation will
be required to remit to FNMA the amount of certain MI coverage
as a result of MI claims rescissions in advance of collection from
the mortgage insurance companies and, in certain cases, it may
not ultimately collect all such amounts from the mortgage
insurance companies.
Cash Settlements
As presented in the table below, during 2012 and 2011, the
Corporation paid $1.8 billion and $5.2 billion to resolve $2.1 billion
and $6.2 billion of repurchase claims through repurchase or
reimbursement to the investor or securitization trust for losses
they incurred, resulting in a loss on the related loans at the time
of repurchase or reimbursement of $847 million and $3.5 billion.
Cash paid for loan repurchases includes the unpaid principal
balance of the loan plus past due interest. The amount of loss for
loan repurchases is reduced by the fair value of the underlying
loan collateral. The repurchase of loans and indemnification
payments related to first-lien and home equity repurchase claims
generally resulted from material breaches of representations and
warranties related to the loans’ material compliance with the
applicable underwriting standards, including borrower
misrepresentation, credit exceptions without sufficient
compensating factors and non-compliance with underwriting
procedures. The actual representations and warranties made in a
sales transaction and the resulting repurchase and
indemnification activity can vary by transaction or investor. A direct
relationship between the type of defect that causes the breach of
representations and warranties and the severity of the realized
loss has not been observed. Transactions to repurchase or
indemnification payments related to first-lien residential
mortgages primarily involved the GSEs while transactions to
repurchase or indemnification payments for home equity loans
primarily involved the monoline insurers. The amounts shown in
the table below do not include $1.8 billion in payments to settle
monoline claims. The table below presents first-lien and home
equity loan repurchases and indemnification payments for 2012
and 2011.
Loan Repurchases and Indemnification Payments
December 31
2012 2011
(Dollars in millions)
Unpaid
Principal
Balance
Cash Paid
for
Repurchases Loss
Unpaid
Principal
Balance
Cash Paid
for
Repurchases Loss
First-lien
Repurchases $ 1,184 $ 1,273 $ 389 $ 2,713 $ 3,067 $ 1,346
Indemnification payments 831 425 425 3,329 2,026 2,026
Total first-lien 2,015 1,698 814 6,042 5,093 3,372
Home equity
Repurchases 24 24 — 28 28 14
Indemnification payments 36 33 33 99 99 99
Total home equity 60 57 33 127 127 113
Total first-lien and home equity $ 2,075 $ 1,755 $ 847 $ 6,169 $ 5,220 $ 3,485
Liability for Representations and Warranties and
Corporate Guarantees
The liability for representations and warranties and corporate
guarantees is included in accrued expenses and other liabilities
on the Corporation’s Consolidated Balance Sheet and the related
provision is included in mortgage banking income (loss). The
liability for representations and warranties is established when
those obligations are both probable and reasonably estimable.
The Corporation’s estimated liability at December 31, 2012 for
obligations under representations and warranties given to the