Fannie Mae 2009 Annual Report Download - page 175

Triad Guaranty Insurance Corporation ceased issuing commitments for new mortgage insurance and began to
run-off its existing business in July 2008. In April 2009, Triad received an order from its regulator that
changes the way it will pay all policyholder claims. Under the order, all valid claims under Triad’s mortgage
guaranty insurance policies will be paid 60% in cash and 40% by the creation of a deferred payment
obligation. Triad began paying claims through this combination of cash and deferred payment obligations in
June 2009. When, and if, Triad’s financial position permits, Triad’s regulator will allow Triad to begin paying
its deferred payment obligations and/or increase the amount of cash Triad pays on claims.
When we estimate the credit losses that are inherent in our mortgage loan portfolio and under the terms of our
guaranty obligations we also consider the recoveries that we will receive on primary mortgage insurance, as
mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We adjust
the contractually due recovery amount to ensure that only amounts which are probable of collection as of the
balance sheet date are included in our loss reserve estimate. As a result, if our assessment of one or more of
our mortgage insurer counterparty’s ability to fulfill their respective obligations to us worsens, it could result
in an increase in our loss reserves.
As of December 31, 2009, our Allowance for loan losses of $10.5 billion and Reserve for guaranty losses of
$54.4 billion incorporated an estimated recovery amount of approximately $16.3 billion from mortgage
insurance related both to loans that are individually measured for impairment and those that are measured
collectively for impairment. This amount is comprised of the contractual recovery of approximately
$18.5 billion as of December 31, 2009 and an adjustment of approximately $2.2 billion which reduces the
contractual recovery for our assessment of our mortgage insurer counterparties’ inability to fully pay those
claims.
For loans that are collectively evaluated for impairment, we estimate the portion of our incurred loss that we
expect to recover from each of our mortgage insurance counterparties based on the losses that have been
incurred, the contractual mortgage insurance coverage, and an estimate of each counterparty’s resources
available to pay claims to Fannie Mae. An analysis by our Counterparty Risk division determines whether,
based on all the information available to the company, any counterparty is considered probable to fail to meet
their obligations in the next 30 months. This period is consistent with the amount of time over which claims
related to losses incurred today are expected to be paid. If that separate analysis finds a counterparty is
probable to fail, we then reserve for the shortfall between incurred claims and estimated resources available to
pay claims to Fannie Mae.
For loans that have been determined to be individually impaired, we calculate a net present value of the
expected cash flows for each loan to determine the level of impairment. These expected cash flow projections
include proceeds from mortgage insurance, that are based, in part, on the internal credit ratings for each of our
mortgage insurance counterparties. Specifically, for loans insured by a mortgage insurer with a poorer credit
rating, our cash flow projections include fewer proceeds from the insurer.
As described above, our methodologies for individually and collectively impaired loans differ as required by
GAAP, but both consider the ability of our counterparties to pay their obligations in a manner that is
consistent with each methodology. As the loans individually assessed for impairment consider the life of the
loan, we use the noted risk ratings to adjust the loss severity in our best estimates of future cash flows. As the
loans collectively assessed for impairment only look to the probable payments we would receive associated
with our loss emergence period, we use the noted shortfall to adjust the loss severity.
When an insured loan held in Fannie Mae’s mortgage portfolio subsequently goes into foreclosure, Fannie
Mae charges off the loan, eliminating any previously-recorded loss reserves, and records real-estate owned and
a mortgage insurance receivable for the claim proceeds deemed probable of recovery, as appropriate. We had
outstanding receivables from mortgage insurers of $2.5 billion as of December 31, 2009 and $1.1 billion as of
December 31, 2008, related to amounts claimed on insured, defaulted loans that we have not yet received. We
assessed the receivables for collectibility, and they are recorded net of a valuation allowance of $51 million as
of December 31, 2009 and $8 million as of December 31, 2008 in “Other assets.” These mortgage insurance
receivables are short-term in nature, having a duration of approximately three to six months, and the valuation
allowance reduces our claim receivable to the amount which is considered probable of collection as of
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