GE 2012 Annual Report Download - page 89

GE 2012 ANNUAL REPORT 87
notes to consolidated financial statements
Based on the uncertainties discussed above, and considering
other environmental factors in Japan, including the runoff status
of the underlying book of business, challenging economic condi-
tions, the impact of laws and regulations (including consideration
of proposed legislation that could impose a framework for col-
lective legal action proceedings), and the financial status of
other local personal lending companies, it is difficult to develop a
meaningful estimate of the aggregate possible claims exposure.
These uncertainties and factors could have an adverse effect on
claims development.
GE Money Japan losses from discontinued operations, net of
taxes, were $649 million, $238 million and $1,671 million in 2012,
2011 and 2010, respectively.
WMC
During the fourth quarter of 2007, we completed the sale of WMC,
our U.S. mortgage business. WMC substantially discontinued all
new loan originations by the second quarter of 2007, and is not a
loan servicer. In connection with the sale, WMC retained certain
representation and warranty obligations related to loans sold to
third parties prior to the disposal of the business and contractual
obligations to repurchase previously sold loans as to which there
was an early payment default. All claims received by WMC for
early payment default have either been resolved or are no longer
being pursued.
Pending repurchase claims based upon representations and
warranties made in connection with loan sales were $5,357 mil-
lion at December 31, 2012, $705 million at December 31, 2011
and $347 million at December 31, 2010. Pending claims represent
those active repurchase claims that identify the specific loans
tendered for repurchase and, for each loan, the alleged breach
of a representation or warranty. As such, they do not include
unspecified repurchase claims, such as the Litigation Claims
discussed below. WMC believes that these types of unspecified
repurchase claims do not meet the substantive and procedural
requirements for tender under the governing agreements or
are otherwise invalid. The amounts reported in pending claims
reflect the purchase price or unpaid principal balances of the
loans at the time of purchase and do not give effect to pay
downs, accrued interest or fees, or potential recoveries based
upon the underlying collateral. Historically, a small percentage of
the total loans WMC originated and sold have qualified as “val-
idly tendered,” meaning the loans sold did not satisfy contractual
obligations. The volume of claims since the second quarter of
2012 reflects increased industry-wide activity by securitization
trustees and investors in residential mortgage-backed securities
(RMBS) issued in 2006 and 2007, and, WMC believes, reflect appli-
cable statutes of limitations considerations.
Reserves related to WMC pending claims were $633 million
at December 31, 2012, reflecting an increase to reserves in the
fourth quarter of 2012 of $25 million due to higher pending claims.
The amount of these reserves is based upon pending and esti-
mated future loan repurchase requests and WMC’s historical loss
experience on loans tendered for repurchase. Given the signifi-
cant recent activity in pending claims and related litigation filed
in connection with such claims, it is difficult to assess whether
future losses will be consistent with WMC’s past experience.
Adverse changes to WMC’s assumptions supporting the reserve
for pending and estimated future repurchase claims may result in
an increase to these reserves. For example, a 50% increase to the
estimate of future loan repurchase requests and a 100% increase
to the estimated loss rate on loans tendered, would result in an
increase to the reserves of approximately $700 million.
WMC is a party to 15 lawsuits involving repurchase claims
on loans included in 12 securitizations in which the adverse par-
ties are securitization trustees or parties claiming to act on their
behalf, four of which were initiated by WMC. In eight of these
lawsuits, the adverse parties allege that WMC is contractually
required to repurchase mortgage loans beyond those included
in WMC’s previously discussed pending claims at December 31,
2012 (Litigation Claims). These Litigation Claims consist of
sampling-based claims in two cases on approximately $900 mil-
lion of mortgage loans and, in the other six cases, claims for
repurchase or damages based on the alleged failure to provide
notice of defective loans, breach of a corporate representation
and warranty, and/or non-specific claims for rescissionary dam-
ages on approximately $3,100 million of mortgage loans. These
claims reflect the purchase price or unpaid principal balances of
the loans at the time of purchase and do not give effect to pay
downs, accrued interest or fees, or potential recoveries based
upon the underlying collateral. As noted above, WMC believes
that the Litigation Claims are disallowed by the governing agree-
ments and applicable law. As a result, WMC has not included the
Litigation Claims in its pending claims or in its estimates of future
loan repurchase requests and holds no related reserve as of
December 31, 2012.
At this point, WMC is unable to develop a meaningful esti-
mate of reasonably possible loss in connection with the Litigation
Claims described above due to a number of factors, including the
extent to which courts will agree with the theories supporting
the Litigation Claims. Specifically, while several courts in cases
not involving WMC have supported some of those theories, other
courts have rejected them. In addition, WMC lacks experience
resolving such claims, and there are few public industry settle-
ments that may serve as benchmarks to estimate a reasonably
possible loss. An adverse court decision allowing plaintiffs to
pursue such claims could increase WMC’s exposure in some or
all of the 15 lawsuits and result in additional claims and lawsuits.
However, WMC believes that it has defenses to all the claims
asserted in litigation, including causation and materiality require-
ments, limitations on remedies for breach of representations and
warranties, and the applicable statutes of limitations. To the extent
WMC is required to repurchase loans, WMC’s loss also would be
affected by several factors, including pay downs, accrued inter-
est and fees, and the value of the underlying collateral. It is not
possible to predict the outcome or impact of these defenses and