Freddie Mac 2010 Annual Report Download - page 130

enhancements do not provide full reimbursement for covered losses. Our credit losses could increase if an entity that
provides credit enhancement fails to fulfill its obligation, as this would reduce the amount of our recovery of credit losses.
Primary mortgage insurance is the most prevalent type of credit enhancement protecting our single-family credit
guarantee 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. Most mortgage insurers increased premiums and tightened
underwriting standards during 2009 and 2008. The amount of insurance we obtain on any mortgage depends on our
requirements and our assessment of risk.
Generally, 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 was 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 was in accordance with their standards, the recovery timelines
extended beginning in 2008 by several months and continued to extend in the last two years. As of December 31, 2010 and
2009, in connection with loans underlying our single-family credit guarantee portfolio, excluding Other Guarantee
Transactions, the maximum amount of losses we could recover under primary mortgage insurance, excluding reimbursement
of expenses, was $52.9 billion and $58.2 billion, respectively.
Other prevalent types of credit enhancements that we use are lender recourse (under which we may require a lender to
repurchase a loan upon default) 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, 2010 and 2009, in connection with loans underlying our single-family credit
guarantee portfolio, excluding Other Guarantee Transactions, the maximum amount of losses we could recover under lender
recourse and indemnification agreements was $9.6 billion and $11.1 billion, respectively, and under pool insurance was
$3.3 billion and $3.6 billion, respectively. In certain instances, the cumulative losses we have incurred as of December 31,
2010 combined with our expectations of potential future claims may exceed the maximum limit of loss allowed by the
policy.
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
met before we are entitled to recover under the policy. Pool insurance proceeds are generally received five to six months
after disposition of the underlying property. 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 pool insurance coverage and our mortgage loan insurers.
Other forms of credit enhancements on our single-family credit guarantee portfolio include government insurance or
guarantees, collateral (including cash or high-quality marketable securities) pledged by a lender, excess interest and
subordinated security structures. At December 31, 2010 and 2009, respectively, the maximum amount of losses we could
recover under other forms of credit enhancements in connection with loans in our single-family credit guarantee portfolio,
excluding Other Guarantee Transactions, was $0.2 billion and $0.3 billion.
At December 31, 2010 and 2009, the UPB of single-family Other Guarantee Transactions with subordination coverage
at origination was $4.1 billion and $4.5 billion, respectively, and the subordination coverage on these securities was
$622 million and $784 million, respectively. However, at December 31, 2010 and 2009, the average serious delinquency rate
on single-family Other Guarantee Transactions with subordination coverage was 21.1% and 24.1%, respectively.
We also use credit enhancements to mitigate risk of loss on certain multifamily mortgages and housing revenue bonds.
Typically, we required credit enhancements on loans in situations where we delegated the underwriting process for the loan
to the seller/servicer, which provides first loss coverage on the mortgage loan. We may also require credit enhancements
during construction or rehabilitation in cases where we commit to purchase or guarantee a permanent loan upon completion
and in cases where occupancy has not yet reached a level that produces the operating income that was the basis for
underwriting the mortgage. The total UPB of mortgage loans in our multifamily mortgage portfolio, excluding Other
Guarantee Transactions, for which we have credit enhancement coverage was $13.0 billion and $11.0 billion as of
December 31, 2010 and December 31, 2009, respectively, and we had maximum potential coverage as of such dates of
$3.4 billion and $3.0 billion, respectively.
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