Fannie Mae 2009 Annual Report Download - page 173

that mortgage servicer. We could also be required to absorb losses on defaulted loans that a failed servicer is
obligated to repurchase from us if we determine there was an underwriting or eligibility breach. For example,
in 2008, IndyMac Bank, F.S.B., one of our single-family mortgage servicers, was closed by the Office of
Thrift Supervision, and the FDIC became its conservator. In March 2009, in connection with the FDIC’s sale
of the IndyMac servicing rights related to our servicing portfolio to another mortgage servicer, we reached a
settlement with the FDIC. In exchange for a payment, we agreed to waive enforcement against the FDIC and
the buyer of certain of our repurchase and indemnity rights. The payment we received in the settlement with
the FDIC was significantly less than the amount for which we filed a claim in the IndyMac Bank receivership
for existing and projected future losses related to repurchases.
We also are exposed to the risk that a mortgage servicer or another party involved in a mortgage loan
transaction will engage in mortgage fraud by misrepresenting the facts about the loan. We have experienced
financial losses in the past and may experience significant financial losses and reputational damage in the
future as a result of mortgage fraud. See “Risk Factors” for additional discussion on risks of mortgage fraud
we are exposed to.
Risk management steps we have taken to mitigate our risk to servicers with whom we have material
counterparty exposure include guaranty of obligations by a higher-rated entity, reduction or elimination of
exposures, reduction or elimination of certain business activities, transfer of exposures to third parties, receipt
of additional collateral and suspension or termination of the servicing relationship.
Mortgage Insurers
We use several types of credit enhancement to manage our single-family mortgage credit risk, including
primary and pool mortgage insurance coverage. Mortgage insurance “risk in force” represents our maximum
potential loss recovery under the applicable mortgage insurance policies. We had total mortgage insurance
coverage risk in force of $106.5 billion on the single-family mortgage loans in our guaranty book of business
as of December 31, 2009, which represented approximately 4% of our single-family guaranty book of business
as of December 31, 2009. Primary mortgage insurance represented $99.6 billion of this total, and pool
mortgage insurance was $6.9 billion. We had total mortgage insurance coverage risk in force of $118.7 billion
on the single-family mortgage loans in our guaranty book of business as of December 31, 2008, which
represented approximately 4% of our single-family guaranty book of business as of December 31, 2008.
Primary mortgage insurance represented $109.0 billion of this total, and pool mortgage insurance was
$9.7 billion.
Increases in mortgage insurance claims due to higher defaults and credit losses in recent periods have
adversely affected the financial results and condition of mortgage insurers. Since January 1, 2009, Standard &
Poor’s, Fitch and Moody’s have downgraded, in some cases more than once, the insurer financial strength
ratings of each of our top seven mortgage insurer counterparties that continue to be rated. As a result of the
downgrades, these mortgage insurer counterparties’ current insurer financial strength ratings are below the
“AA-” level that we require under our qualified mortgage insurer approval requirements to be considered
qualified as a “Type 1” mortgage insurer. Due to these downgrades, we have begun to primarily rely on our
internal credit ratings when assessing our exposure to a counterparty.
Our rating structure is based on a scale of 1 to 8. A rating of 1 represents a counterparty that we view as
having excellent credit quality. We consider the credit quality of an 8 to be poor. These internal ratings, which
reflect our views of a mortgage insurer’s claims paying ability, are based primarily on an assessment of the
mortgage insurer’s capital adequacy and liquidity. These assessments conducted in making our credit quality
determinations involve in-depth credit reviews of each mortgage insurer, a comprehensive analysis of the
mortgage insurance sector, stress analyses of the insurer’s portfolio, discussions with the insurer’s
management, the insurer’s plans to maintain capital within the insuring entity and our views on
macroeconomic variables which impact a mortgage insurer’s estimated future paid losses, such as changes in
home prices and changes in interest rates. From time to time, we may also discuss its situation with the rating
agencies.
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