12. 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 30 days of origination. The majority of mortgage loan 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.

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,
	2013			2012
	(In millions)
Loan Servicing Portfolio Composition
Owned	$	135,351		$	142,930
Subserviced(1)	93,286			40,800
Total	$	228,637		$	183,730
Conventional loans	$	192,301		$	149,432
Government loans	30,211			29,842
Home equity lines of credit	6,125			4,456
Total	$	228,637		$	183,730
Weighted-average interest rate	4.2		%	4.3		%

	June 30, 2013				December 31, 2012
	Number of Loans		Unpaid Balance		Number of Loans		Unpaid Balance
Portfolio Delinquency(2)
30 days	2.58	%	2.03	%	2.45	%	1.93	%
60 days	0.75	%	0.60	%	0.64	%	0.52	%
90 or more days	1.04	%	0.95	%	0.80	%	0.70	%
Total(1)	4.37	%	3.58	%	3.89	%	3.15	%
Foreclosure/real estate owned(3)	2.49	%	2.44	%	2.05	%	1.92	%

(1) The total servicing portfolio increased during the three months ended June 30, 2013 due to the assumption of a new subservicing portfolio. Excluding the subservicing portfolio assumed during the three months ended June 30, 2013, the Company’s total portfolio delinquency and foreclosure/real estate owned based on the number of loans were 3.84% and 2.01%, respectively and based on the unpaid principal balance were 2.97% and 1.79%, respectively.

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

(3) As of June 30, 2013 and December 31, 2012, the total servicing portfolio included 25,978 and 17,329 of loans in foreclosure with an unpaid principal balance of $4.9 billion and $3.0 billion, respectively. Excluding the subservicing portfolio assumed during the three months ended June 30, 2013, the Company’s total servicing portfolio included 16,080 of loans in foreclosure with an unpaid principal balance of $2.8 billion.

Repurchase and Foreclosure-Related Reserves

Representations and warranties are provided to investors and insurers on a significant portion of loans sold and are also assumed on purchased mortgage servicing rights. In the event of a breach of these representations and warranties, the Company may be required to repurchase the mortgage loan or indemnify the investor against loss. 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 originator. Repurchase and foreclosure-related reserves are maintained for probable losses related to repurchase and indemnification obligations and for on-balance sheet loans in foreclosure and real estate owned.

A summary of the activity in repurchase and foreclosure-related reserves is as follows:

	Six Months Ended
	June 30,
	2013		2012
	(In millions)
Balance, beginning of period	$	191	$	127
Realized losses	(37)		(66)
Increase in reserves due to:
Changes in assumptions	26		104
New loan sales	11		10
Balance, end of period	$	191	$	175

Repurchase and 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 $133.1 billion; however, the maximum amount of 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, 2013, approximately $196 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; 14% of which were at least 90 days delinquent (calculated based upon the unpaid principal balance of the loans).

As of June 30, 2013 and December 31, 2012, liabilities for probable losses related to repurchase and indemnification obligations of $141 million and $140 million, respectively, are included in Other liabilities in the Condensed Consolidated Balance Sheets. The liability for loan repurchases and indemnifications represents management’s estimate of probable losses based on the best information available and requires the application of a significant level of judgment and the use of a number of assumptions. These assumptions include the estimated amount and timing of repurchase and indemnification requests, the expected success rate in defending against requests, estimated insurance claim proceeds and denials and estimated loss severities on repurchases and indemnifications. The liability for loan repurchases and indemnifications does not reflect losses from litigation or governmental and regulatory examinations, investigations or inquiries.

While the Company uses the best information available in estimating the liability, actual experience can vary significantly from the assumptions as the estimation process is inherently uncertain. Given the increased levels of repurchase requests and repurchase and foreclosure-related charges in recent periods, there is a reasonable possibility that future losses may be in excess of the recorded liability. As of June 30, 2013, the estimated amount of reasonably possible losses in excess of the recorded liability was approximately $45 million. This estimate assumes that repurchase and indemnification requests remain at an elevated level through the year ended December 31, 2013, the success rate in defending against repurchase requests declines and that the Company will incur increased foreclosure-related costs that are not expected to be reimbursed pursuant to government mortgage insurance programs. The Company’s estimate of reasonably possible losses does not represent probable losses and is based upon significant judgments and assumptions which can be influenced by many factors, including: (i) home prices and the levels of home equity; (ii) the criteria used by investors in selecting loans to request; (iii) the quality of our underwriting procedures; (iv) borrower delinquency and default patterns; and (v) general economic conditions.

Mortgage Loans in Foreclosure and Real Estate Owned

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

	June 30,		December 31,
	2013		2012
	(In millions)
Mortgage loans in foreclosure(1)	$	176	$	148
Allowance for probable foreclosure losses	(25)		(28)
Mortgage loans in foreclosure, net	$	151	$	120
Real estate owned	$	75	$	76
Adjustment to value for real estate owned	(25)		(23)
Real estate owned, net	$	50	$	53

(1) Includes $93 million and $65 million of recoverable advances as of June 30, 2013 and December 31, 2012, respectively.

Mortgage Reinsurance

During the three months ended June 30, 2013, the Company terminated its remaining inactive reinsurance contract which settled the liability and exposure to loss under that contract and released the $118 million restricted cash and investments held in trust to pay future losses. The primary mortgage insurer received a $49 million termination payment from the trust account and the Company was entitled to the remaining $69 million unrestricted cash balance. As of June 30, 2013, the Company received $30 million in unrestricted cash, and the remaining $39 million was recorded in Accounts receivable, net in the Condensed Consolidated Balance Sheets. During the three and six months ended June 30, 2013, the termination resulted in a pre-tax loss of $21 million which was recorded in Loan servicing income in the Condensed Consolidated Statements of Operations.

During the three months ended June 30, 2012, the Company terminated one of its inactive reinsurance contracts. During the three and six months ended June 30, 2012, this termination resulted in a pre-tax loss of $16 million which was recorded in Loan servicing income in the Condensed Consolidated Statements of Operations.

A summary of the activity in the liability for reinsurance losses is as follows:

	Six Months Ended
	June 30,
	2013		2012
	(In millions)
Balance, beginning of period	$	33	$	84
Realized losses(1)	(35)		(51)
Increase in liability for reinsurance losses	2		10
Balance, end of period	$	—	$	43

(1) Realized reinsurance losses for the six months ended June 30, 2013 and 2012 includes $28 million and $21 million, respectively, related to the release of reserves associated with the termination of inactive reinsurance agreements.

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, 2013 and December 31, 2012, both direct financing leases greater than 90 days past due and direct financing leases greater than 90 days past due that are still accruing interest were $3 million and $5 million, respectively and there were no allowances for credit losses related to direct financing leases at the end of either period.