Freddie Mac 2009 Annual Report Download - page 165

to be insignificant. Although many of our single-family Structured Transactions are credit enhanced, we present the credit-
enhancement coverage information for these securities separately in Table 63 below due to the use of subordination in many
of the securities’ structures.
We recognized recoveries of $2.1 billion and $0.8 billion in 2009 and 2008, respectively, under our primary and pool
mortgage insurance policies and other credit enhancements as discussed below related to our single-family mortgage
portfolio. In 2009, there has been a significant decline in our credit enhancement coverage for new purchases compared to
2008 that is primarily a result of the high refinance activity during the period. Refinance loans typically have lower LTV
ratios, which fall below the threshold that requires mortgage insurance coverage. In addition, we have been purchasing
significant amounts of Freddie Mac Relief Refinance Mortgages
SM
. These mortgages allow for the refinance of existing loans
guaranteed by us under terms such that we may not have mortgage insurance for some or all of the unpaid principal balance
of the mortgage in excess of 80% of the value of the property for certain of these loans.
Our ability and desire to expand or reduce the portion of our total mortgage portfolio covered by credit enhancements
will depend on our evaluation of the credit quality of new business purchase opportunities, the risk profile of our portfolio
and the future availability of effective credit enhancements at prices that permit an attractive return. While the use of credit
enhancements reduces our exposure to mortgage credit risk, it increases our exposure to institutional credit risk. As
guarantor, we remain responsible for the payment of principal and interest if mortgage insurance or other credit
enhancements do not provide full reimbursement for covered losses. If an entity that provides credit enhancement fails to
fulfill its obligation, the result could be a reduction in the amount of our recovery of charge-offs in our GAAP results.
Primary mortgage insurance is the most prevalent type of credit enhancement protecting our single-family mortgage
portfolio and is typically provided on a loan-level basis. Primary mortgage insurance transfers varying portions of the credit
risk associated with a mortgage to a third-party insurer. The amount of insurance we obtain on any mortgage depends on our
requirements and our assessment of risk. We may, from time to time, agree with the insurer to reduce the amount of
coverage that is in excess of our charter’s minimum requirement. Most mortgage insurers increased premiums and tightened
underwriting standards during 2008 and 2009. These actions may impact our ability to serve borrowers making a down
payment of less than 20% of the value of the property at the time of loan origination.
In order to file a claim under a primary mortgage insurance policy, the insured loan must be in default and the
borrower’s interest in the underlying property must have been extinguished, such as through a foreclosure action. The
mortgage insurer has a prescribed period of time within which to process a claim and make a determination as to its validity
and amount. Historically, it typically took two months from the time a claim is filed to receive a primary mortgage insurance
payment; however, due to our insurers’ performing greater diligence reviews on these claims to verify that the original
underwriting of the loans by our seller/servicers is in accordance with their standards, the recovery timelines extended during
2008 by several months and continued to extend in 2009. As of December 31, 2009 and 2008, in connection with loans
underlying our issued PCs and Structured Securities, excluding Structured Transactions, the maximum amount of losses we
could recover under primary mortgage insurance, excluding reimbursement of expenses, was $55.2 billion and $59.4 billion,
respectively.
Other prevalent types of credit enhancements that we use are lender recourse and indemnification agreements (under
which we may require a lender to reimburse us for credit losses realized on mortgages), as well as pool insurance. Pool
insurance provides insurance on a pool of loans up to a stated aggregate loss limit. In addition to a pool-level loss coverage
limit, some pool insurance contracts may have limits on coverage at the loan level. For pool insurance contracts that expire
before the completion of the contractual term of the mortgage loan, we seek to ensure that the contracts cover the period of
time during which we believe the mortgage loans are most likely to default. As of December 31, 2009 and 2008, in
connection with loans underlying our issued PCs and Structured Securities, excluding Structured Transactions, the maximum
amount of losses we could recover under lender recourse and indemnification agreements was $9.0 billion and $11.0 billion,
respectively, and under pool insurance was $3.4 billion and $3.8 billion, respectively. In certain instances, the cumulative
losses we have incurred as of December 31, 2009 combined with our expectations of potential future claims may exceed the
maximum limit of loss allowed by the policy.
Most mortgage insurers that provide pool and primary mortgage insurance coverage to us have been downgraded by
nationally recognized statistical rating organizations. We have institutional credit risk relating to the potential insolvency or
non-performance of mortgage insurers that insure mortgages we purchase or guarantee. See “Institutional Credit Risk —
Mortgage Insurers” for further discussion about our mortgage loan insurers.
In order to file a claim under a pool insurance policy, we generally must have finalized the primary mortgage claim,
disposed of the foreclosed property, and quantified the net loss payable to us with respect to the insured loan to determine
the amount due under the pool insurance policy. Certain pool insurance policies have specified loss deductibles that must be
162 Freddie Mac