Note 15—Liability for Losses Under Representations and Warranties

The Company’s agreements with Fannie Mae and Freddie Mac include representations and warranties related to the loans the Company sells to those Agencies. The representations and warranties require adherence to Agency origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

In the event of a breach of its representations and warranties, the Company may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or insurer. In such cases, the Company bears any subsequent credit loss on the mortgage loans. The Company’s credit loss may be reduced by any recourse it has to correspondent lenders that, in turn, had sold such mortgage loans to the Company and breached similar or other representations and warranties. In such event, the Company has the right to seek a recovery of related repurchase losses from the correspondent lender.

The Company records a provision for losses relating to the representations and warranties it makes as part of its loan sale transactions. The method used to estimate the liability for representations and warranties is a function of estimated future defaults, loan repurchase rates, the potential severity of loss in the event of defaults and, for loans purchased from correspondent lenders, the probability of reimbursement by the correspondent lenders. The Company establishes a liability at the time loans are sold and continually updates its liability estimate.

Following is a summary of the Company’s liability for representations and warranties:

	Quarter ended September 30,					Nine months ended September 30,
	2013			2012		2013			2012
	(in thousands)
Balance at beginning of period	$	6,185		$	1,387	$	3,504		$	449
Provisions for losses on loans sold	1,069			918		3,766			1,856
Incurred losses	(39		)	—		(55		)	—
Balance at end of period	$	7,215		$	2,305	$	7,215		$	2,305
Unpaid principal balance of mortgage loans subject to representations and warranties	$	20,428,213		$	6,444,618	$	20,428,213		$	6,444,618

Following is a summary of the Company’s repurchase activity:

	Quarter ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
	(in thousands)
During the period:
Unpaid balance of mortgage loans repurchased	$	1,973	$	—	$	6,840	$	—
Unpaid principal balance of mortgage loans put to correspondent lenders	$	357	$	—	$	1,410	$	—
At period end:
Unpaid principal balance of mortgage loans subject to pending claims for repurchase	$	1,249	$	3,459	$	1,249	$	3,459

The Company’s representations and warranties are generally not subject to stated limits of exposure. However, management believes that the current unpaid principal balance of loans sold by the Company to date represents the maximum exposure to repurchases related to representations and warranties.

The level of the liability for representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor demand strategies, and other external conditions that will change over the lives of the underlying loans. However, management believes the amount and range of reasonably possible losses in relation to the recorded liability is not material to the Company’s financial condition or results of operations.