Fannie Mae 2010 Annual Report Download - page 182

particular lender, and in return receive some compensation. This means that these mortgage insurers will
require fewer mortgage insurance rescissions for origination defects for the impacted loans. For loans covered
by these agreements, to the extent we do not uncover loan defects independently for loans that otherwise
would have resulted in mortgage insurance rescission, we may be at risk of additional loss. It is unclear how
prevalent this type of agreement between mortgage insurers and lenders may become or how many loans it
may impact. We have required our top mortgage insurer counterparties to notify us promptly of any such
agreements to waive rights either to investigate claims or to rescind mortgage insurance coverage. Because
loans covered by such agreements will be subject to fewer mortgage insurance rescissions, we expect that our
own independent review process will lead to loan repurchases that otherwise would have been subject to a
rescission of mortgage insurance coverage. We examine these arrangements to determine if other actions are
necessary.
Besides evaluating their condition to assess whether we have incurred probable losses in connection with our
coverage, we also evaluate these counterparties individually to determine whether or under what conditions
they will remain eligible to insure new mortgages sold to us. Except for Triad Guaranty Insurance
Corporation, as of February 24, 2011, our private mortgage insurer counterparties remain qualified to conduct
business with us. However, based on our evaluation of them, we may impose additional terms and conditions
of approval on some of our mortgage insurers, including: limiting the volume and types of loans they may
insure for us; requiring them to obtain our consent prior to providing risk sharing arrangements with mortgage
lenders; and requiring them to meet certain financial conditions, such as maintaining a minimum level of
policyholders’ surplus, a maximum risk-to-capital ratio, a maximum combined ratio, parental or other capital
support agreements and limitations on the types and volumes of certain assets that may be considered as liquid
assets.
From time to time, we may enter into negotiated transactions with mortgage insurer counterparties pursuant to
which we agree to cancel or restructure insurance coverage, in excess of charter requirements, in exchange for
a fee. These insurance cancellations and restructurings may provide our counterparties with capital relief and
provide us with cash in lieu of future claims that the counterparty may not be able to pay, thereby reducing
our future counterparty credit exposure. We may negotiate additional insurance coverage restructurings in
2011, though fewer than prior years.
We generally are required pursuant to our charter to obtain credit enhancement on single-family conventional
mortgage loans that we purchase or securitize with LTV ratios over 80% at the time of purchase. In
connection with Refi Plus, we are generally able to purchase an eligible loan if the loan has mortgage
insurance in an amount at least equal to the amount of mortgage insurance that existed on the loan that was
refinanced. As a result, these refinanced loans with updated LTV ratios above 80% and up to 125% may have
no mortgage insurance or less insurance than we would otherwise require for a loan not originated under this
program. In the current environment, many mortgage insurers have stopped insuring new mortgages with
higher LTV ratios or with lower borrower credit scores or on select property types, which has contributed to
the reduction in our business volumes for high LTV ratio loans. In addition, FHA’s role as the lower-cost
option for loans with higher LTV ratios has also reduced our acquisitions of these types of loans. If our
mortgage insurer counterparties further restrict their eligibility requirements or new business volumes 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 find suitable alternative methods of obtaining credit enhancement for these loans, or if
FHA continues to be the lower-cost option for some consumers, and in some cases the only option, for loans
with higher LTV ratios, we may be further restricted in our ability to purchase or securitize loans with LTV
ratios over 80% at the time of purchase.
Financial Guarantors
We were the beneficiary of financial guarantees totaling $8.8 billion as of December 31, 2010 and $9.6 billion
as of December 31, 2009 on securities held in our investment portfolio or on securities that have been
resecuritized to include a Fannie Mae guaranty and sold to third parties. The securities covered by these
guarantees consist primarily of private-label mortgage-related securities and mortgage revenue bonds. We are
also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal
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