Freddie Mac 2015 Annual Report Download - page 133

Management's Discussion and Analysis Risk Management | Institutional Credit Risk
Freddie Mac 2015 Form 10-K 131
With respect to primary mortgage insurers, we currently cannot differentiate pricing based on counterparty
strength or revoke a primary mortgage insurer's status as an eligible insurer without FHFA approval.
Further, we do not select the insurance provider on a specific loan, since the selection is made by the
lender at the time the loan is originated. Accordingly, we are unable to manage our concentration risk with
respect to primary mortgage insurers. However, in recent years, new entrants emerged that will likely help
diversify our concentrated primary mortgage insurer exposure among more market participants over time.
As part of our ACIS credit risk transfer initiative, we regularly obtain insurance coverage from global
insurers and reinsurers. This initiative incorporates several features designed to increase the likelihood
that we will recover on the claims we file with the insurers, including the following:
• In each ACIS transaction, we require the individual ACIS insurers and reinsurers to post collateral to
cover portions of their exposure, which helps to promote certainty of coverage and timely claim
payment; and
• While private mortgage insurance companies are required to be monoline (i.e., to participate solely in
the mortgage insurance business, although the holding company may be a diversified insurer), our
ACIS insurers and reinsurers participate in multiple types of insurance businesses, which helps to
diversify their risk exposure.
We acquired our bond insurance coverage when purchasing non-agency mortgage-related securities in
prior years and have not obtained any new bond insurance coverage in many years.
Maintaining Eligibility Standards
We maintain eligibility standards for mortgage insurers. In 2015, at the direction of FHFA, we published
revised eligibility requirements for mortgage insurers, in conjunction with Fannie Mae, which became
effective for all Freddie Mac-approved mortgage insurers on December 31, 2015. These revised eligibility
requirements include financial requirements determined using a risk-based framework, and were
designed to promote the ability of mortgage insurers to fulfill their intended role of providing consistent
liquidity throughout the mortgage cycle. Our mortgage insurers are required to submit audited financial
information and certify compliance with these new requirements by March 1, 2016. We will confirm our
mortgage insurers' capital adequacy as part of reviewing eligibility compliance subsequent to receiving
relevant information.
In 2014, we issued and implemented revised master policies for mortgage insurers that are designed to
provide greater certainty of coverage and facilitate timely claims processing.
Evaluating Counterparty Financial Strength and Performance and Monitoring our Exposure
We monitor our exposure to individual insurers by performing periodic analysis of the financial capacity of
each insurer under various adverse economic conditions.
The table below summarizes our exposure to single-family primary mortgage insurers as of December 31,
2015. In the event a mortgage insurer fails to perform, the coverage amounts represent our maximum
exposure to credit losses resulting from such a failure.