Fannie Mae 2011 Annual Report Download - page 186

As a result, in April 2011, we issued an announcement which prohibited servicers from entering into any
agreement that modifies the terms of an approved mortgage insurance master policy on loans delivered to us. We
also required servicers to disclose any such agreements with mortgage insurers to us. With respect to our
mortgage insurance counterparties, changes to the substance of their master policies have required our prior
approval since 2005. In October 2010, we required our top mortgage insurers to notify us promptly of any
agreement that affects their investigative or rescission rights. In April 2011, we further clarified and amended our
mortgage insurer requirements to prohibit any agreement that has the effect of modifying a master policy,
including any investigative or rescission rights, absent our approval. By taking these steps, we expect to mitigate
the risk of loss for loans that would have resulted in mortgage insurance rescission, and—as a result—a lender
repurchase, for loan defects that we may not have otherwise uncovered in our independent review process.
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 evaluate
the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts
to ensure that only probable losses 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.
The following table displays our estimated benefit from mortgage insurer recoveries. Our valuation allowance for
mortgage insurer receivables increased significantly from December 31, 2010 to December 31, 2011 as a result
of our determination that our mortgage insurer counterparties’ financial condition has deteriorated.
Table 58: Estimated Mortgage Insurance Benefit
As of December 31,
2011 2010
(Dollars in millions)
Contractual mortgage insurance benefit(1) ....................................... $15,099 $17,507
Less: Collectability adjustment(2) .............................................. 2,867 1,150
Estimated benefit included in total loss reserves .................................. $12,232 $16,357
(1) Relates to loans that are individually measured for impairment and those that are collectively reserved.
(2) Represents an adjustment that reduces the contractual benefit for our assessment of our mortgage insurer counterparties’
inability to fully pay the contractual mortgage insurance 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 us. 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 us.
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.
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