Freddie Mac 2009 Annual Report Download - page 317

During the twelve months ended December 31, 2009, our top three multifamily lenders, CBRE Melody & Company,
Deutsche Bank Berkshire Mortgage and Berkadia Commercial Mortgage LLC (which acquired Capmark Finance Inc. in
December 2009), each accounted for more than 10% of our multifamily mortgage purchase volume, and represented
approximately 40% of our multifamily purchase volume. These top lenders are among the largest mortgage loan originators
in the U.S. in the multifamily markets. We are also exposed to the risk that if multifamily seller/servicers come under
financial pressure due to the current stressful economic environment, they could be adversely affected, which could
potentially cause degradation in the quality of service they provide or, in certain cases, reduce the likelihood that we could
recover losses on loans covered by recourse agreements or other credit enhancements. Capmark Finance Inc., which serviced
17.1% of the multifamily loans on our consolidated balance sheet, filed for bankruptcy on October 25, 2009. On
November 24, 2009, the U.S. Bankruptcy Court for the District of Delaware gave Capmark Financial Group Inc.
(“Capmark”) approval to complete the sale of its North American servicing and mortgage banking businesses to Berkadia
Commercial Mortgage LLC (Berkadia). The sale to Berkadia, a newly formed entity owned by Berkshire Hathaway Inc. and
Leucadia National Corporation, was completed in December 2009. As of December 31, 2009, affiliates of Centerline
Holding Company serviced 5.0% of the multifamily loans on our consolidated balance sheet. Centerline Holding Company
announced that it was pursuing a restructuring plan with its debt holders due to adverse financial conditions. We continue to
monitor the status of all our multifamily servicers in accordance with our counterparty credit risk management framework.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency or non-performance of mortgage insurers that insure
mortgages we purchase or guarantee. For our exposure to mortgage insurers, we evaluate the recovery from insurance
policies for mortgage loans that we hold for investment as well as loans underlying our PCs and Structured Securities as part
of the estimate of our loan loss reserves. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES —
Allowance for Loan Losses and Reserve for Guaranty Losses” for additional information. At December 31, 2009, these
insurers provided coverage, with maximum loss limits of $62.3 billion, for $312.4 billion of unpaid principal balance in
connection with our single-family mortgage portfolio, excluding mortgage loans backing Structured Transactions. Our top six
mortgage insurer counterparties, Mortgage Guaranty Insurance Corporation (or MGIC), Radian Guaranty Inc., Genworth
Mortgage Insurance Corporation, PMI Mortgage Insurance Co., United Guaranty Residential Insurance Co. and Republic
Mortgage Insurance Co. each accounted for more than 10% and collectively represented approximately 94% of our overall
mortgage insurance coverage at December 31, 2009. All of our mortgage insurance counterparties received credit rating
downgrades during the twelve months of 2009, based on the lower of the S&P or Moody’s rating scales and stated in terms
of the S&P equivalent. All our mortgage insurance counterparties are rated BBB+ or below as of December 31, 2009, based
on the S&P rating scale.
The balance of our outstanding accounts receivable from mortgage insurers, net of associated reserves, was
approximately $1.0 billion and $678 million as of December 31, 2009 and 2008, respectively. In June 2008, Triad Guaranty
Insurance Corporation (or Triad) ceased issuing new policies and entered voluntary run-off. On June 1, 2009, Triad began
paying valid claims 60% in cash and 40% in deferred payment obligations. Our outstanding accounts receivable, net of our
reserves, from outstanding claims and deferred payment obligations of Triad was less than $100 million as of December 31,
2009. Most of our mortgage insurance counterparties are at risk of falling out of compliance with regulatory capital
requirements in several states. In the absence of other alternatives to address their compliance issues, they may be subject to
regulatory actions that could restrict the insurer’s ability to issue new policies, which could negatively impact our access to
mortgage insurance for loans with high LTV ratios. In the event one or more of our mortgage insurers were to become
insolvent, it is likely that we would not collect all of our claims from the affected insurer, and it would impact our ability to
recover certain credit losses on covered single-family mortgage loans. Except for Triad, we expect mortgage insurers to
continue to pay our claims in the near term. We believe that some of our mortgage insurers lack sufficient ability to fully
meet all of their expected lifetime claims-paying obligations to us as they emerge. In 2009, several of our mortgage insurers
requested that we approve, as eligible insurers, new subsidiaries or affiliates to write new mortgage insurance business in any
state where the insurers’ regulatory capital requirements were breached, and the regulator does not issue a waiver. On
February 11, 2010 we approved such a request from MGIC. We are considering the remaining requests. A reduction in the
number of eligible mortgage insurers could further concentrate our exposure to the remaining insurers.
Bond Insurers
Bond insurance, including primary and secondary policies, is an additional credit enhancement covering some of our
investments in non-agency securities. Primary policies are owned by the securitization trust issuing securities we purchase,
while secondary policies are acquired directly by us. At December 31, 2009, we had coverage, including secondary policies
on securities, totaling $11.7 billion of unpaid principal balance of our investments in securities. At December 31, 2009, the
top five of our bond insurers, Ambac Assurance Corporation, Financial Guaranty Insurance Company (or FGIC), MBIA
314 Freddie Mac