Fannie Mae 2010 Annual Report Download - page 181

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 us, 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, which is included in our allowance
for loan losses or reserve for guaranty losses. 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. Also, as our internal credit ratings of our mortgage
insurer counterparties decrease, we reduce the amount of benefits we expect to receive from the insurance they
provide, which in turn increases the fair value of our guaranty obligation.
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 our mortgage portfolio subsequently goes into foreclosure, we charge off the
loan, eliminating any previously-recorded loss reserves, and record REO and a mortgage insurance receivable
for the claim proceeds deemed probable of recovery, as appropriate. However, if a mortgage insurer rescinds
their insurance coverage, the initial receivable becomes due from the mortgage seller/servicer. We had
outstanding receivables of $4.4 billion as of December 31, 2010 and $2.5 billion as of December 31, 2009
related to amounts claimed on insured, defaulted loans that we have not yet received, of which $648 million
as of December 31, 2010 and $301 million as of December 31, 2009 was due from our mortgage seller/
servicers. We assessed the receivables for collectibility, and they are recorded net of a valuation allowance of
$317 million as of December 31, 2010 and $51 million as of December 31, 2009 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 that we consider probable of
collection. We received proceeds under our primary and pool mortgage insurance policies for single-family
loans of $6.4 billion for the year ended December 31, 2010 and $3.6 billion for the year ended December 31,
2009. During the years ended December 31, 2010 and 2009, we negotiated the cancellation and restructurings
of some of our mortgage insurance coverage in exchange for a fee. The cash fees received of $796 million for
the year ended December 31, 2010 and $668 million for the year ended December 31, 2009 are included in
our total insurance proceeds amount.
Our mortgage insurer counterparties have generally continued to pay claims owed to us, except where deferred
payment terms have been established. Our mortgage insurer counterparties have increased the number of
mortgage loans for which they have rescinded coverage. In those cases where the mortgage insurance was
obtained to meet our charter requirements or where we independently agree with the materiality of the finding
that was the basis for the rescission, we generally require the seller/servicer to repurchase the loan or
indemnify us against loss. We also independently review the origination loan files based upon internal
protocols, and seek repurchase of those loans where we discover material underwriting defects,
misrepresentation, or fraud.
In the second quarter of 2010, some mortgage insurers disclosed agreements with certain lenders whereby they
agree to waive certain rights to investigate claims for significant product segments of the insured loans for that
176