Credit Risk

6 Months Ended

Jun. 30, 2011

9. Credit Risk

The Company is subject to the following forms of credit risk:

	•		Consumer credit risk—through mortgage banking activities as a result of originating and servicing residential mortgage loans

	•		Commercial credit risk—through fleet management and leasing activities

	•		Counterparty credit risk—through derivative transactions, sales agreements and various mortgage loan origination and servicing agreements

Consumer Credit Risk

The Company is not subject to the majority of the risks inherent in maintaining a mortgage loan portfolio because loans are not held for investment purposes and are generally sold to investors within 60 days of origination. The majority of mortgage loans sales are on a non-recourse basis; however, the Company has exposure in certain circumstances in its capacity as a loan originator and servicer to loan repurchases and indemnifications through representation and warranty provisions. Additionally, the Company has exposure through its reinsurance agreements that are inactive and in runoff.

Loan performance is an indicator of the inherent risk associated with our origination and servicing activities. In limited circumstances, the Company has exposure to possible losses on loans within the servicing portfolio due to loan repurchases and indemnifications, as further discussed below. The following tables summarize certain information regarding the total loan servicing portfolio, which includes loans associated with the capitalized Mortgage servicing rights as well as loans subserviced for others:


	June 30,		December 31,
	2011		2010
Loan Servicing Portfolio Composition:	(In millions)
Owned	$	144,615	$	140,160
Subserviced		29,036		25,915

Total servicing portfolio	$	173,651	$	166,075


Conventional loans	$	140,198	$	136,261
Government loans		26,810		23,100
Home equity lines of credit		6,643		6,714

Total servicing portfolio	$	173,651	$	166,075


Weighted-average interest rate		4.8%		4.9%


	June 30, 2011				December 31, 2010
	Number		Unpaid		Number		Unpaid
Portfolio Delinquency⁽¹⁾	of Loans		Balance		of Loans		Balance
30 days	2.17	%	1.82	%	2.36	%	2.01	%
60 days	0.53	%	0.47	%	0.67	%	0.60	%
90 or more days	0.95	%	0.93	%	1.21	%	1.27	%

Total delinquency	3.65	%	3.22	%	4.24	%	3.88	%

Foreclosure/real estate owned ⁽²⁾	2.06	%	2.13	%	2.30	%	2.37	%


⁽¹⁾		Represents the loan servicing portfolio delinquencies as a percentage of the total number of loans and the total unpaid balance of the portfolio.

⁽²⁾		As of June 30, 2011 and December 31, 2010, there were 16,913 and 18,554 of loans in foreclosure with unpaid principal balances of $3.0 billion and $3.3 billion, respectively.

Foreclosure-Related Reserves

Representations and warranties are provided to purchasers and insurers on a significant portion of loans sold and are assumed on purchased mortgage servicing rights. In the event of a breach of these representations and warranties, the Company may be required to repurchase a mortgage loan or indemnify the purchaser, and any loss on the mortgage loan may be borne by the Company. If there is no breach of a representation and warranty provision, there is no obligation to repurchase the loan or indemnify the investor against loss. In limited circumstances, the full risk of loss on loans sold is retained to the extent the liquidation of the underlying collateral is insufficient. In some instances where the Company has purchased loans from third parties, it may have the ability to recover the loss from the third party.

Foreclosure-related reserves are maintained for probable losses related to repurchase and indemnification obligations and on-balance sheet loans in foreclosure and real estate owned. A summary of the activity in foreclosure-related reserves is as follows:


	Six Months Ended
	June 30,
	2011			2010
	(In millions)
Balance, beginning of period	$	111		$	86
Realized foreclosure losses		(35	)		(32	)
Increase in reserves due to:
Changes in assumptions		39			45
New loan sales		7			5

Balance, end of period	$	122		$	104

Foreclosure-related reserves consist of the following:

Loan Repurchases and Indemnifications

The maximum exposure to representation and warranty provisions exceeds the amount of loans in the capitalized portfolio of $142.4 billion; however, the range of total possible losses cannot be estimated because the Company does not service all of the loans for which it has provided representations or warranties. As of June 30, 2011, approximately $197 million of loans have been identified in which the Company has full risk of loss or has identified a breach of representation and warranty provisions; 15% of which were at least 90 days delinquent (calculated based upon the unpaid principal balance of the loans).

As of June 30, 2011 and December 31, 2010, liabilities for probable losses related to repurchase and indemnification obligations of $88 million and $74 million, respectively, are included in Other liabilities in the Condensed Consolidated Balance Sheets.

Mortgage Loans in Foreclosure and Real Estate Owned

Mortgage loans in foreclosure represent the unpaid principal balance of mortgage loans for which foreclosure proceedings have been initiated, plus recoverable advances made on those loans. These amounts are recorded net of an allowance for probable losses on such mortgage loans and related advances.

Real estate owned, which are acquired from mortgagors in default, are recorded at the lower of the adjusted carrying amount at the time the property is acquired or fair value. Fair value is estimated based upon the estimated net realizable value of the underlying collateral less the estimated costs to sell.

The carrying values of the mortgage loans in foreclosure and real estate owned are recorded within Other Assets on the Condensed Consolidated Balance Sheets as follows:


	June 30,			December 31,
	2011			2010
	(In millions)
Mortgage loans in foreclosure	$	120		$	128
Allowance for probable losses		(21	)		(22	)

Mortgage loans in foreclosure, net	$	99		$	106


Real Estate Owned	$	49		$	54
Adjustment to estimated net realizable value		(13	)		(15	)

Real Estate Owned, net	$	36		$	39

Mortgage Reinsurance

The Company has exposure to consumer credit risk through losses from two contracts with primary mortgage insurance companies, that are inactive and in runoff. The exposure to losses through these reinsurance contracts is based on mortgage loans pooled by year of origination.

As of June 30, 2011, the contractual reinsurance period for each pool was 10 years and the weighted-average reinsurance period was 4.5 years. Loss rates on these pools are determined based on the unpaid principal balance of the underlying loans. The Company indemnifies the primary mortgage insurers for losses that fall between a stated minimum and maximum loss rate on each annual pool. In return for absorbing this loss exposure, the Company is contractually entitled to a portion of the insurance premium from the primary mortgage insurers.

The Company is required to hold cash and securities in trust related to this potential obligation, which were $246 million, included in Restricted cash, cash equivalents and investments in the Condensed Consolidated Balance Sheet as of June 30, 2011. The amount of cash and securities held in trust is contractually specified in the reinsurance agreements and is based on the original risk assumed under the contracts and the incurred losses to date.

As of June 30, 2011 the unpaid reinsurance losses outstanding were $8 million, and $97 million was included in Other liabilities in the Condensed Consolidated Balance Sheet for incurred and incurred but not reported losses associated with mortgage reinsurance activities (estimated on an undiscounted basis).

A summary of the activity in reinsurance-related reserves is as follows:


	Six Months Ended
	June 30,
	2011			2010
	(In millions)
Balance, beginning of period	$	113		$	108
Realized reinsurance losses		(33	)		(6	)
Increase in liability for reinsurance losses		17			26

Balance, end of period	$	97		$	128

Commercial Credit Risk

Vehicle leases are primarily classified as operating leases; however, certain leases are classified as direct financing leases and recorded within Net investment in fleet leases in the Condensed Consolidated Balance Sheets.

As of June 30, 2011 and December 31, 2010, direct financing leases greater than 90 days past due total $20 million and $19 million, respectively. As of June 30, 2011 and December 31, 2010, direct financing leases greater than 90 days that are still accruing interest were $18 million and $16 million and the allowance for credit losses was $2 million and $3 million, respectively.