Freddie Mac 2008 Annual Report Download - page 168

multifamily loans. We conduct quality control reviews of our multifamily mortgage seller/servicers to determine whether they
remain in compliance with our standards.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency or non-performance of mortgage insurers that insure
mortgages we purchase or guarantee. We manage this risk by establishing eligibility standards for mortgage insurers and by
regularly monitoring our exposure to individual mortgage insurers. Our monitoring includes regularly performing analysis of
the estimated financial capacity of mortgage insurers under different adverse economic conditions. We periodically perform
on-site reviews of mortgage insurers to confirm compliance with our eligibility requirements and to evaluate their
management and control practices. In addition, state insurance authorities regulate mortgage insurers and we periodically
meet with certain state authorities to review market concerns. We also monitor the mortgage insurers’ credit ratings, as
provided by nationally recognized statistical rating organizations, and we periodically review the methods used by such
organizations. Most of our mortgage insurers received significant rating downgrades during 2008.
Table 72 summarizes our exposure to mortgage insurers as of December 31, 2008.
Table 72 — Mortgage Insurance by Counterparty
Counterparty Name S&P Credit Rating
(1)
Credit Rating Outlook
Primary
Insurance
(2)
Pool
Insurance
(2)
Maximum
Exposure
(3)
As of December 31, 2008
(in billions)
Mortgage Guaranty Insurance Corp. (or MGIC) . . . . . . . A⫺Credit Watch Negative $ 60 $52 $16
Radian Guaranty Inc. . ........................ BBB+ Credit Watch Negative 41 24 12
Genworth Mortgage Insurance Corporation (or
Genworth) . . ............................. A+ Credit Watch Negative 42 1 11
PMI Mortgage Insurance Co. (or PMI) . . . .......... A⫺Credit Watch Negative 32 4 8
United Guaranty Residential Insurance Co. (or UGRI) . . . A⫺Credit Watch Negative 31 1 8
Republic Mortgage Insurance Company (or RMIC) . . . . . A Negative 27 4 7
Triad Guaranty Insurance Corp. . ................. n/a
(4)
n/a
(4)
15 5 4
CMG Mortgage Insurance Co. . . ................. AA⫺Negative 3 — 1
Total . . . . . . . ............................. $251 $91 $67
(1) Latest rating available as of March 2, 2009. Financial conditions have been changing rapidly in the last year, which has caused greater divergence in the
ratings of individual insurers by nationally recognized statistical rating organizations.
(2) Represents the amount of unpaid principal balance at the end of the period for our single-family mortgage portfolio covered by the respective insurance
type.
(3) Represents the remaining aggregate contractual limit for reimbursement of losses of principal incurred under policies of both primary and pool
insurance. These amounts are based on our gross coverage without regard to netting of coverage that may exist on some of the related mortgages for
double-coverage under both types of insurance.
(4) In June 2008, Triad announced that it would cease issuing new business and enter into voluntary run-off. While in run-off status, Triad stated that it will
continue to honor its existing commitments for as long as it has resources to do so.
For an insurer to be designated by us as a Freddie Mac-Type I insurer, the company must be rated by at least two of the
following three rating agencies — S&P, Moody’s, and Fitch, and must not receive a rating less than AA–/Aa3 by any listed
rating agency. The Type I designation allows insurers to do business with us, subject to the fewest restrictions. Effective
June 1, 2008, our mortgage insurer counterparties may not cede new risk to captive reinsurers if the gross risk or gross
premium ceded to captive reinsurers is greater than 25%. Effective February 2008, we temporarily suspended certain
requirements for our mortgage insurance counterparties that are downgraded below AA– or Aa3 by any of the rating
agencies, provided the mortgage insurer commits to providing a remediation plan for our approval within 90 days of the
downgrade. As shown in Table 72 above, all of our mortgage insurance counterparties, except CMG Mortgage Insurance Co.,
were downgraded below AA– as of March 2, 2009. We reviewed the remediation plans for returning to AA-rated status
provided by each of MGIC, Radian Guaranty Inc. and PMI after their downgrades below AA. Based on those plans, we
continue to treat their eligibility as if they were Freddie Mac-Type I insurers. We are currently reviewing the remediation
plans of RMIC, UGRI and Genworth. We consider the recovery from mortgage insurance policies as part of the estimate of
our provision for credit losses. To date, downgrades of insurer financial strength ratings and our evaluation of remediation
plans provided by our mortgage insurance counterparties have not significantly affected our provision for credit losses.
We received proceeds of $596 million and $318 million during 2008 and 2007, respectively, from our primary and pool
mortgage insurance policies for recovery of losses related to our single-family mortgage portfolio. We had outstanding
receivables from mortgage insurers, net of associated reserves, of $678 million and $219 million as of December 31, 2008
and December 31, 2007, respectively, related to amounts claimed on foreclosed properties. Our receivable balance for
insurance recovery claims has risen significantly during 2008 as the volume of loss events, such as foreclosure sales has
increased. Based upon currently available information, we expect that all of our mortgage insurance counterparties possess
adequate financial strength and capital to meet their obligations to us for the near term.
165 Freddie Mac