Bank of America 2012 Annual Report Download - page 55

Bank of America 2012 53
Open Mortgage Insurance Rescission Notices
In addition to repurchase claims, we receive notices from mortgage
insurance companies of claim denials, cancellations or coverage
rescission (collectively, MI rescission notices) and the number of
such notices has remained elevated. By way of background,
mortgage insurance compensates lenders or investors for certain
losses resulting from borrower default on a mortgage loan. When
there is disagreement with the mortgage insurer as to the
resolution of a MI rescission notice, meaningful dialogue and
negotiation between the mortgage insurance company and the
Corporation are generally necessary to reach a resolution on an
individual notice. The level of engagement of the mortgage
insurance companies varies and ongoing litigation involving some
of the mortgage insurance companies over individual and bulk
rescissions or claims for rescission limits our ability to engage in
constructive dialogue leading to resolution.
For loans sold to GSEs or private-label securitization trusts
(including those wrapped by the monoline bond insurers), when
we receive a MI rescission notice from a mortgage insurance
company, it may give rise to a claim for breach of the applicable
representations and warranties from the GSEs or private-label
securitization trusts, depending on the governing sales contracts.
In those cases where the governing contract contains MI-related
representations and warranties, which upon rescission require us
to repurchase the affected loan or indemnify the investor for the
related loss, we realize the loss without the benefit of MI. See
below for a discussion of the impact of the FNMA Settlement. In
addition, mortgage insurance companies have in some cases
asserted the ability to curtail MI payments as a result of alleged
foreclosure delays, which if successful, would reduce the MI
proceeds available to reduce the loss on the loan.
At December 31, 2012, we had approximately 110,000 open
MI rescission notices compared to 90,000 at December 31, 2011,
including 49,000 pertaining principally to first-lien mortgages
serviced for others, 11,000 pertaining to loans held-for-investment
(HFI), and 50,000 pertaining to ongoing litigation for second-lien
mortgages. Approximately 27,000 of the open MI rescission
notices pertaining to first-lien mortgages serviced for others are
related to loans sold to FNMA. As of December 31, 2012, 32
percent of the MI rescission notices received have been resolved.
Of those resolved, 20 percent were resolved through our
acceptance of the MI rescission, 58 percent were resolved through
reinstatement of coverage or payment of the claim by the mortgage
insurance company, and 22 percent were resolved on an aggregate
basis through settlement, policy commutation or similar
arrangement. As of December 31, 2012, 68 percent of the MI
rescission notices we have 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 our 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. We are in the process of reviewing 37 percent of
the remaining open MI rescission notices, and we have reviewed
and are 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. Our 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. We had informed FNMA that we did not believe
that the new policy was valid under our 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, we 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, we may not ultimately collect all
such amounts from the mortgage insurance companies. For
additional information, see Note 8 – Representations and
Warranties Obligations and Corporate Guarantees to the
Consolidated Financial Statements.
Representations and Warranties Liability
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). Our
estimate of the liability for representations and warranties
exposure and the corresponding range of possible loss is based
on currently available information, significant judgment and a
number of factors and assumptions that are subject to change.
For additional information, see the Estimated Range of Possible
Loss section below and Note 8 – Representations and Warranties
Obligations and Corporate Guarantees to the Consolidated
Financial Statements and, for information related to the sensitivity
of the assumptions used to estimate our liability for obligations
under representations and warranties, see Complex Accounting
Estimates – Representations and Warranties on page 122.
The liability for obligations under representations and
warranties and the corresponding estimated range of possible loss
for these representations and warranties exposures do not
consider any losses related to litigation matters, including litigation
brought by monoline insurers, nor do they include any separate
foreclosure costs and related costs, assessments and
compensatory fees or any other possible losses related to
potential claims for breaches of performance of servicing
obligations, except as such losses are included as potential costs
of the BNY Mellon Settlement, potential securities law or fraud
claims or potential indemnity or other claims against us, including
claims related to loans insured by the FHA. We are not able to
reasonably estimate the amount of any possible loss with respect
to any such servicing, securities law, fraud or other claims against
us, except to the extent reflected in the aggregate range of possible