Wells Fargo 2010 Annual Report Download - page 99

in our capacity as a servicer, foreclosing on defaulted mortgage
loans or, to the extent consistent with the applicable
securitization or other investor agreement, considering
alternatives to foreclosure such as loan modifications or short
sales and, in our capacity as a master servicer, overseeing the
servicing of mortgage loans by the servicer. If we commit a
material breach of our obligations as servicer or master servicer,
we may be subject to termination if the breach is not cured
within a specified period of time following notice, which can
generally be given by the securitization trustee or a specified
percentage of security holders, causing us to lose servicing
income. In addition, we may be required to indemnify the
securitization trustee against losses from any failure by us, as a
servicer or master servicer, to perform our servicing obligations
or any act or omission on our part that involves willful
misfeasance, bad faith or gross negligence. For certain investors
and/or certain transactions, we may be contractually obligated to
repurchase a mortgage loan or reimburse the investor for credit
losses incurred on the loan as a remedy for servicing errors with
respect to the loan. If we have increased repurchase obligations
because of claims that we did not satisfy our obligations as a
servicer or master servicer, or increased loss severity on such
repurchases, we may have to materially increase our repurchase
reserve.
We may incur costs if we are required to, or if we elect to re-
execute or re-file documents or take other action in our capacity
as a servicer in connection with pending or completed
foreclosures. We may incur litigation costs if the validity of a
foreclosure action is challenged by a borrower. If a court were to
overturn a foreclosure because of errors or deficiencies in the
foreclosure process, we may have liability to the borrower and/or
to any title insurer of the property sold in foreclosure if the
required process was not followed. These costs and liabilities
may not be legally or otherwise reimbursable to us, particularly
to the extent they relate to securitized mortgage loans. In
addition, if certain documents required for a foreclosure action
are missing or defective, we could be obligated to cure the defect
or repurchase the loan. We may incur liability to securitization
investors relating to delays or deficiencies in our processing of
mortgage assignments or other documents necessary to comply
with state law governing foreclosures. The fair value of our MSRs
may be negatively affected to the extent our servicing costs
increase because of higher foreclosure costs. We may be subject
to fines and other sanctions, including a foreclosure moratorium
or suspension, imposed by Federal or state regulators as a result
of actual or perceived deficiencies in our foreclosure practices or
in the foreclosure practices of other mortgage loan servicers. Any
of these actions may harm our reputation or negatively affect our
residential mortgage origination or servicing business.
For more information, refer to the “Earnings Performance –
Noninterest Income,” “Risk Management – Liability for
Mortgage Loan Repurchase Losses” and “– Risks Relating to
Servicing Activities,” and “Critical Accounting Policies –
Valuation of Residential Mortgage Servicing Rights” sections in
this Report.
We could recognize OTTI on securities held in our
available-for-sale portfolio if economic and market
conditions do not improve. Our securities available-for-sale
portfolio had gross unrealized losses of $2.7 billion at December
31, 2010. We analyze securities held in our available-for-sale
portfolio for OTTI on a quarterly basis. The process for
determining whether impairment is other than temporary
usually requires difficult, subjective judgments about the future
financial performance of the issuer and any collateral underlying
the security in order to assess the probability of receiving
contractual principal and interest payments on the security.
Because of changing economic and market conditions affecting
issuers and the performance of the underlying collateral, we may
be required to recognize OTTI in future periods, thus reducing
earnings.
For more information, refer to the “Balance Sheet Analysis –
Securities Available for Sale” and “Current Accounting
Developments” sections and Note 5 (Securities Available for
Sale) to Financial Statements in this Report.
We rely on our systems and certain counterparties, and
certain failures could materially adversely affect our
operations. Our businesses are dependent on our ability to
process, record and monitor a large number of complex
transactions. If any of our financial, accounting, or other data
processing systems fail or have other significant shortcomings,
we could be materially adversely affected. Third parties with
which we do business could also be sources of operational risk to
us, including relating to breakdowns or failures of such parties’
own systems. Any of these occurrences could diminish our ability
to operate one or more of our businesses, or result in potential
liability to clients, reputational damage and regulatory
intervention, any of which could materially adversely affect us.
If personal, confidential or proprietary information of
customers or clients in our possession were to be mishandled or
misused, we could suffer significant regulatory consequences,
reputational damage and financial loss. Such mishandling or
misuse could include, for example, if such information were
erroneously provided to parties who are not permitted to have
the information, either by fault of our systems, employees, or
counterparties, or where such information is intercepted or
otherwise inappropriately taken by third parties.
We may be subject to disruptions of our operating systems
arising from events that are wholly or partially beyond our
control, which may include, for example, computer viruses or
electrical or telecommunications outages, natural disasters,
disease pandemics or other damage to property or physical
assets, or events arising from local or larger scale politics,
including terrorist acts. Such disruptions may give rise to losses
in service to customers and loss or liability to us.
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