Freddie Mac 2008 Annual Report Download - page 169

Non-Freddie Mac Securities
Investments in non-Freddie Mac issued securities expose us to institutional credit risk to the extent that servicers,
issuers, guarantors, or third parties providing credit enhancements become insolvent or do not perform. Our non-Freddie Mac
mortgage-related securities portfolio consists of both agency and non-agency mortgage-related securities. Agency mortgage-
related securities, which are securities issued or guaranteed by Fannie Mae or Ginnie Mae, present minimal institutional
credit risk due to the prevailing view that these securities have a level of credit quality at least equivalent to non-agency
mortgage-related securities rated AAA (based on the S&P rating scale or an equivalent rating from other nationally
recognized statistical rating organizations). See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related
Investments Portfolio” for more information on institutional credit risk associated with our mortgage-related investments
portfolio, including information on higher risk components and an analysis of significant impairment charges we recorded
during 2008 related to our investments in non-agency mortgage-related securities.
Non-agency mortgage-related securities expose us to institutional credit risk if the nature of the credit enhancement
relies on a third party to cover potential losses. Most of our non-agency mortgage-related securities rely primarily on
subordinated tranches to provide credit loss protection and limit exposure to counterparty risk. Bond insurance, including
primary and secondary policies, is an additional credit enhancement covering non-agency securities held in our mortgage-
related investments portfolio or non-mortgage-related investments held in our cash and other investments portfolio. Primary
policies are acquired by the issuing trust while secondary policies are acquired by us. Bond insurance exposes us to the risks
related to the bond insurer’s ability to satisfy claims. As of December 31, 2008, we had insurance coverage, including
secondary policies, on securities totaling $16 billion of unpaid principal balance, consisting of $15 billion and $1 billion of
coverage for bonds in our non-agency mortgage-related securities and other investment portfolios, respectively. Table 73
presents our coverage amounts of monoline bond insurance, including secondary coverage, for all securities held on our
balance sheets. In the event a monoline bond insurer fails to perform, the coverage outstanding represents our maximum
exposure to loss related to such a failure.
Table 73 — Monoline Bond Insurance by Counterparty
Counterparty Name S&P Credit Rating
(1)
S&P Credit Rating Outlook
(1)
Coverage Outstanding
(2)
(in billions) Percent of Total
(2)
December 31, 2008
Ambac Assurance Corporation ............... A Negative $ 6 37%
Financial Guaranty Insurance Company ......... CCC Negative 3 18
MBIA Inc. ............................ BBB+ Negative 4 22
Financial Security Assurance Inc. . . . ......... AAA Watch Negative 2 14
Others
(3)
.............................. — — 1 9
Total ................................ $16 100%
(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 contractual limit for reimbursement of losses incurred on our investment in non-agency mortgage-related securities and non-mortgage-
related securities. Percentages are calculated without regard to rounding of coverage for individual counterparties.
(3) No remaining counterparty represents greater than 10% of our total coverage outstanding.
We seek to manage institutional credit risk on non-agency mortgage-related securities by only purchasing securities that
meet our investment guidelines and performing ongoing analysis to evaluate the creditworthiness of the issuers and servicers
of these securities and the bond insurers that guarantee them. To assess the creditworthiness of bond insurers, we may
perform additional analysis, including on-site visits, and similar due diligence measures. In accordance with our risk
management policies we will continue to actively monitor the financial strength of bond insurers in this challenging market
environment. In the event one or more of these bond insurers were to become insolvent, it is likely that we would not collect
all of our claims from the affected insurer and it may impact our ability to recover certain unrealized losses on our
investment portfolios. To date, no bond insurer has failed to meet its obligations to us; however we recognized impairment
losses during 2008 on securities covered by three of these insurers due to concerns over whether or not those insurers will
meet our future claims. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related Investments
Portfolio — Other-than-Temporary Impairments,” for additional information.
Mortgage Investors and Originators
We are exposed to pre-settlement risk through the purchase, sale and financing of mortgage loans and mortgage-related
securities with mortgage investors and originators. The probability of such a default is generally remote over the short time
horizon between the trade and settlement date. We manage this risk by evaluating the creditworthiness of our counterparties
and monitoring and managing our exposures. In some instances, we may require these counterparties to post collateral.
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