Fannie Mae 2012 Annual Report Download - page 129

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initiative, seeks to provide lenders a higher degree of certainty and clarity regarding their repurchase exposure and liability on
future deliveries, as well as consistency around repurchase timelines and remedies. Under the new framework, lenders will be
relieved of certain repurchase obligations for loans that meet specific payment history requirements and other eligibility
requirements. For example, a lender would not be required to repurchase a mortgage loan in breach of certain underwriting
and eligibility representations and warranties if the borrower has made timely payments for 36 months following the
acquisition date (or, for Refi Plus loans, for 12 months following the acquisition date), and the loan meets other specified
eligibility requirements. Certain representations and warranties are “life of loan” representations and warranties, meaning that
no relief from enforcement is available to lenders regardless of the number of payments made by a borrower. Examples of life
of loan representations and warranties include, but are not limited to, a lender’s representation and warranty that it has
originated a loan in compliance with all laws and that the loan conforms to our Charter requirements. As a result of this new
framework, we are making changes in our quality control process that moves the primary focus of our quality control reviews
from the time a loan defaults to shortly after the time the loan is delivered to us. These changes include augmenting the
random sampling approach we currently use in selecting new mortgage loan deliveries for review with more targeted,
discretionary loan selections.
As discussed in “Our Charter and Regulation of Our Activities—Charter Act,” our charter generally requires credit
enhancement on any single-family conventional mortgage loan that we purchase or securitize if it has an LTV ratio over 80%
at the time of purchase. However, under HARP, we allow our borrowers who have mortgage loans with current LTV ratios
above 80% to refinance their mortgages without obtaining new mortgage insurance in excess of what was already in place.
See “Credit Profile Summary—Home Affordable Refinance Program and Refi Plus Loans” below for more discussion on
HARP and its impact on our single-family conventional business volume and guaranty book of business.
Borrower-paid primary mortgage insurance is the most common type of credit enhancement in our single-family guaranty
book of business. Primary mortgage insurance transfers varying portions of the credit risk associated with a mortgage loan to
a third-party insurer. In order for us to receive a payment in settlement of a claim under a primary mortgage insurance policy,
the insured loan must be in default and the borrower’s interest in the property that secured the loan must have been
extinguished, generally in a foreclosure action. The claims process for primary mortgage insurance typically takes three to six
months after title to the property has been transferred.
Mortgage insurers may also provide pool mortgage insurance, which is insurance that applies to a defined group of loans.
Pool mortgage insurance benefits typically are based on actual loss incurred and are subject to an aggregate loss limit. Under
some of our pool mortgage insurance policies, we are required to meet specified loss deductibles before we can recover under
the policy. We typically collect claims under pool mortgage insurance three to six months after disposition of the property
that secured the loan. For a discussion of our aggregate mortgage insurance coverage as of December 31, 2012 and 2011, see
“Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Mortgage Insurers.”
Our mortgage servicers are the primary points of contact for borrowers and perform a vital role in our efforts to reduce
defaults and pursue foreclosure alternatives. We discuss the actions we have taken to improve the servicing of our delinquent
loans below in “Problem Loan Management.”
Single-Family Portfolio Diversification and Monitoring
Diversification within our single-family mortgage credit book of business by product type, loan characteristics and geography
is an important factor that influences credit quality and performance and may reduce our credit risk. We monitor various loan
attributes, in conjunction with housing market and economic conditions, to determine if our pricing and our eligibility and
underwriting criteria accurately reflect the risk associated with loans we acquire or guarantee. In some cases, we may decide
to significantly reduce our participation in riskier loan product categories. We also review the payment performance of loans
in order to help identify potential problem loans early in the delinquency cycle and to guide the development of our loss
mitigation strategies.
The profile of our guaranty book of business is comprised of the following key loan attributes:
• LTV ratio. LTV ratio is a strong predictor of credit performance. The likelihood of default and the gross severity of a
loss in the event of default are typically lower as the LTV ratio decreases. This also applies to the estimated mark-to-
market LTV ratios, particularly those over 100%, as this indicates that the borrower’s mortgage balance exceeds the
property value.
• Product type. Certain loan product types have features that may result in increased risk. Generally, intermediate-term,
fixed-rate mortgages exhibit the lowest default rates, followed by long-term, fixed-rate mortgages. Historically,
adjustable-rate mortgages (“ARMs”), including negative-amortizing and interest-only loans, and balloon/reset
mortgages have exhibited higher default rates than fixed-rate mortgages, partly because the borrower’s payments rose,
within limits, as interest rates changed.