11. 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:

	March 31,			December 31,
	2014			2013
	(In millions)
Loan Servicing Portfolio Composition
Owned	$	128,813		$	130,494
Subserviced	96,931			96,343
Total	$	225,744		$	226,837
Conventional loans	$	191,418		$	191,916
Government loans	28,762			29,200
Home equity lines of credit	5,564			5,721
Total	$	225,744		$	226,837
Weighted-average interest rate	4.0		%	4.0		%

	March 31, 2014				December 31, 2013
	Number of Loans		Unpaid Balance		Number of Loans		Unpaid Balance
Portfolio Delinquency(1)
30 days	1.95	%	1.48	%	2.43	%	1.82	%
60 days	0.64	%	0.51	%	0.83	%	0.62	%
90 or more days	0.98	%	0.80	%	1.08	%	0.90	%
Total	3.57	%	2.79	%	4.34	%	3.34	%
Foreclosure/real estate owned(2)	2.44	%	2.32	%	2.46	%	2.36	%

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

(2)	As of March 31, 2014 and December 31, 2013, the total servicing portfolio included 24,272 and 24,892 of loans in foreclosure with an unpaid principal balance of $4.6 billion and $4.7 billion, respectively.

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:

	Three Months Ended
	March 31,
	2014		2013
	(In millions)
Balance, beginning of period	$	142	$	191
Realized losses	(24)		(17		)
Increase in reserves due to:
Changes in assumptions	—		15
New loan sales	2		5
Balance, end of period	$	120	$	194

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 $127.2 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 March 31, 2014, $215 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 March 31, 2014 and December 31, 2013, liabilities for probable losses related to repurchase and indemnification obligations of $80 million and $100 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 inherent uncertainties involved in estimating losses associated with future repurchase and indemnification requests, there is a reasonable possibility that future losses may be in excess of the recorded liability. As of March 31, 2014, the estimated amount of reasonably possible losses in excess of the recorded liability was $25 million which relates to our estimate of repurchase and foreclosure-related charges that may not be reimbursed pursuant to government mortgage insurance programs in the event we do not file insurance claims. The estimate is based on our expectation of future defaults and the historical defect rate for government insured loans. 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 quality of our underwriting procedures; (iii) borrower delinquency and default patterns; and (iv) 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:

	March 31,		December 31,
	2014		2013
	(In millions)
Mortgage loans in foreclosure(1)	$	185	$	192
Allowance for probable foreclosure losses	(20)		(20)
Mortgage loans in foreclosure, net	$	165	$	172
Real estate owned	$	75	$	73
Adjustment to value for real estate owned	(20)		(22)
Real estate owned, net	$	55	$	51

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(1)	Includes $113 million and $118 million of recoverable advances as of March 31, 2014 and December 31, 2013, respectively.

Mortgage Reinsurance

The Company no longer has exposure to consumer credit risk through reinsurance activities since any contractual reinsurance agreements were terminated in the second quarter of 2013. As of March 31, 2013, the Company had exposure to losses from one contract with a primary mortgage insurance company that was inactive and in runoff. During the three months ended March 31, 2013, the increase in the liability for reinsurance losses was not significant and the Company realized losses of $4 million.

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 March 31, 2014 and December 31, 2013, 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 not significant. There were no allowances for credit losses related to direct financing leases at the end of either period.