Wells Fargo 2010 Annual Report Download - page 89

absence of delinquent taxes or liens against the property securing
the loan, compliance with applicable origination laws, and other
matters. For more information about these loan sales and the
related risks that may result in liability see the “Risk
Management – Credit Risk Management – Liability for Mortgage
Loan Repurchase Losses” section in this Report.
We may be required to repurchase mortgage loans, indemnify
the securitization trust, investor or insurer, or reimburse the
securitization trust, investor or insurer for credit losses incurred
on loans (collectively “repurchase”) in the event of a breach of
contractual representations or warranties that is not remedied
within a period (usually 90 days or less) after we receive notice of
the breach. Typically, we would only be required to repurchase
securitized loans if any such breach is deemed to have material
and adverse effect on the value of the mortgage loan or to the
interests of the security holders in the mortgage loan. The time
periods specified in our mortgage loan sales contracts to respond
to repurchase requests vary, but are generally 90 days or less.
While many contracts do not include specific remedies if the
applicable time period for a response is not met, contracts for
mortgage loan sales to the GSEs include various types of specific
remedies and penalties that could be applied to inadequate
responses to repurchase requests. Similarly, the agreements
under which we sell mortgage loans require us to deliver various
documents to the securitization trust or investor, and we may be
obligated to repurchase any mortgage loan for which the
required documents are not delivered or are defective. Upon
receipt of a repurchase request, we work with securitization
trusts, investors or insurers to arrive at a mutually agreeable
resolution. Repurchase demands are typically reviewed on an
individual loan by loan basis to validate the claims made by the
securitization trust, investor or insurer, and to determine
whether a contractually required repurchase event occurred.
Occasionally, in lieu of conducting the loan level evaluation, we
may negotiate global settlements in order to resolve a pipeline of
demands in lieu of repurchasing the loans. We manage the risk
associated with potential repurchases or other forms of
settlement through our underwriting and quality assurance
practices and by servicing mortgage loans to meet investor and
secondary market standards.
We establish mortgage repurchase liabilities related to
various representations and warranties that reflect
management’s estimate of losses for loans for which we could
have repurchase obligation, whether or not we currently service
those loans, based on a combination of factors. Such factors
incorporate estimated levels of defects based on internal quality
assurance sampling, default expectations, historical investor
repurchase demand and appeals success rates (where the
investor rescinds the demand based on a cure of the defect or
acknowledges that the loan satisfies the investor’s applicable
representations and warranties), reimbursement by
correspondent and other third party originators, and projected
loss severity. We establish a liability at the time loans are sold
and continually update our liability estimate during their life.
Although investors may demand repurchase at any time, the
majority of repurchase demands occur in the first 24 to 36
months following origination of the mortgage loan and can vary
by investor. Most repurchases under our representation and
warranty provisions are attributable to borrower
misrepresentations and appraisals obtained at origination that
investors believe do not fully comply with applicable industry
standards.
Although, to date, repurchase demands with respect to private
label mortgage-backed securities have been more limited than
with respect to GSE-guaranteed securities, it is possible that
requests to repurchase mortgage loans in private label
securitizations may increase in frequency as investors explore
every possible avenue to recover losses on their securities. In
addition, the Federal Housing Finance Agency, as conservator of
Freddie Mac and Fannie Mae, recently used its subpoena power
to request loan applications, property appraisals and other
documents from large mortgage securitization industry
participants, including us, relating to private label MBS in order
to determine whether breaches of representations and
warranties exist in those securities owned by the GSEs. We
believe the risk of repurchase in our private label securitizations
is substantially reduced, relative to other private label
securitizations, because approximately half of the private label
securitizations that include our mortgage loans do not contain
representations and warranties regarding borrower or other
third party misrepresentations related to the mortgage loan,
general compliance with underwriting guidelines, or property
valuation, which are commonly asserted bases for repurchase.
We evaluate the validity and materiality of any claim of breach of
representations and warranties in private label MBS that is
brought to our attention and work with securitization trustees to
resolve any repurchase requests. Nevertheless, we may be subject
to legal and other expenses if private label securitization trustees
or investors choose to commence legal proceedings in the event
of disagreements.
The mortgage loan repurchase liability at December 31, 2010,
represents our best estimate of the probable loss that we may
incur for various representations and warranties in the
contractual provisions of our sales of mortgage loans. Because
the level of mortgage loan repurchase losses are dependent on
economic factors, investor demand strategies and other external
conditions that may change over the life of the underlying loans,
the level of the liability for mortgage loan repurchase losses is
difficult to estimate and requires considerable management
judgment. We maintain regular contact with the GSEs and other
significant investors to monitor and address their repurchase
demand practices and concerns. For additional information on
our repurchase liability, including an adverse impact analysis,
see the “Risk Management – Credit Risk Management – Liability
for Mortgage Loan Repurchase Losses” section in this Report.
Fair Valuation of Financial Instruments
We use fair value measurements to record fair value adjustments
to certain financial instruments and to determine fair value
disclosures. Trading assets, securities available for sale,
derivatives, prime residential MHFS, certain commercial LHFS,
principal investments and securities sold but not yet purchased
(short sale liabilities) are recorded at fair value on a recurring
basis. Additionally, from time to time, we may be required to
record at fair value other assets on a nonrecurring basis, such as
certain MHFS and LHFS, loans held for investment and certain
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