Freddie Mac 2010 Annual Report Download - page 52

each of our mortgage insurers. Based on our analysis of the financial condition of a mortgage insurer and pursuant to our
eligibility requirements for mortgage insurers, we could take action against a mortgage insurer intended to protect our
interests that may impact the timing and amount of claims payments received from that insurer.
In the event one or more of our bond 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 unrealized losses on our investments in
non-agency mortgage-related securities. We expect to receive substantially less than full payment of our claims from
Financial Guaranty Insurance Company, or FGIC, and Ambac Assurance Corporation, or Ambac, due to adverse
developments concerning these companies. We believe that, in addition to FGIC and Ambac, some of our other bond insurers
lack sufficient ability to fully meet all of their expected lifetime claims-paying obligations to us as such claims emerge. For
more information on the developments concerning FGIC and Ambac, see “MD&A — RISK MANAGEMENT — Credit
Risk — Institutional Credit Risk — Bond Insurers.”
If mortgage insurers were to further tighten their standards or fall out of compliance with regulatory capital
requirements, the volume of high LTV ratio mortgages available for us to purchase could be reduced, which could
negatively affect our business and make it more difficult for us to meet our affordable housing goals. Mortgage insurance
standards could constrain our ability to increase our purchases of high LTV loans in the future, should we want to do so.
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
specified credit enhancements or participation interests. Our purchases of mortgages with LTV ratios above 80% (other than
relief refinance mortgages) have declined in recent years, in part because mortgage insurers tightened their eligibility
requirements with respect to the issuance of insurance on new mortgages with higher LTV ratios. Recently, mortgage
insurers have loosened some of these requirements. However, if mortgage insurers further restrict their eligibility
requirements for high LTV ratio loans, or if we are no longer willing or able to obtain mortgage insurance from these
counterparties, and we are not able to avail ourselves of suitable alternative methods of obtaining credit enhancement for
these loans, we may be further restricted in our ability to purchase or securitize loans with LTV ratios over 80% at the time
of purchase.
If a mortgage insurance company were to fall out of compliance with regulatory capital requirements and not obtain
appropriate waivers, it could become subject to regulatory actions that restrict its ability to write new business in certain, or
in some cases all, states. At least one of our mortgage insurers has fallen out of compliance with regulatory capital
requirements, and others may do so in the future.
A mortgage insurer may attempt a corporate restructuring designed to enable it to continue to write new business
through a new entity in the event the insurer falls out of compliance with regulatory capital requirements. Several insurers
have completed such a restructuring. However, there can be no assurance that an insurer would be able to effect such a
restructuring in the future, as the restructured entity would be required to satisfy regulatory requirements as well as our own
conditions. These restructuring plans generally involve contributing capital to a subsidiary or affiliate. This could result in
less liquidity available to the mortgage insurer to pay claims on its existing book of business, and an increased risk that the
mortgage insurer would not pay its claims in full in the future.
Where mortgage insurance or another charter-acceptable credit enhancement is not available, it may be more difficult
for us to purchase high LTV ratio (above 80%) loans that refinance mortgages into more affordable loans. The unavailability
of suitable credit enhancement could also negatively impact our ability to pursue new business opportunities relating to high
LTV ratio and other higher risk loans, should we seek, or be directed, to pursue such business opportunities. This could also
impact our ability to meet our affordable housing goals, as purchases of loans with high LTV ratios can contribute to our
performance under those goals.
The loss of business volume from key lenders could result in a decline in our market share and revenues.
Our business depends on our ability to acquire a steady flow of mortgage loans. We purchase a significant percentage of
our single-family mortgages from several large mortgage originators. During 2010 and 2009, approximately 78% and 74%,
respectively, of our guaranteed mortgage securities issuances originated from purchase volume associated with our ten largest
customers. During 2010, three mortgage lenders (Wells Fargo Bank, N.A., Bank of America, N.A. and Chase Home
Finance LLC) each accounted for more than 10% of our single-family mortgage purchase volume and collectively accounted
for approximately 50% of our single-family mortgage purchase volume. Similarly, we acquire a significant portion of our
multifamily mortgage loans from several large lenders. We enter into mortgage purchase volume commitments with many of
our single-family customers that provide for the customers to deliver to us a specified dollar amount of mortgages during a
specified period of time. Some commitments may also provide for the lender to deliver to us a minimum percentage of their
total sales of conforming loans. There is a risk that we will not be able to enter into a new commitment with a key customer
that will maintain mortgage purchase volume following the expiration of the existing commitment. Since 2007, the mortgage
industry has consolidated significantly and a smaller number of large lenders originate most single-family mortgages. The
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