Freddie Mac 2008 Annual Report Download - page 270

servicer of mortgages previously serviced by Washington Mutual in return for JPMorgan Chase’s agreement to assume
Washington Mutual’s recourse obligations to repurchase any of such mortgages that were sold to Freddie Mac with recourse.
With respect to mortgages that Washington Mutual sold to Freddie Mac without recourse, JPMorgan Chase has agreed to
make a one-time payment to Freddie Mac with respect to obligations of Washington Mutual to repurchase any of such
mortgages that are inconsistent with certain representations and warranties made at the time of sale. Chase Home
Finance LLC, a subsidiary of JPMorgan Chase, is also a significant seller/servicer and provided 9% of our single-family
mortgage purchase volume during the year ended December 31, 2008. In addition, Wachovia Corporation, the parent of our
customers Wachovia Bank, N.A. and Wachovia Mortgage, FSB, which together accounted for 2% of our single-family
mortgage purchase volume during the year ended December 31, 2008, agreed to be acquired by Wells Fargo & Company in
September 2008. Wells Fargo Bank, N.A., a subsidiary of Wells Fargo & Company, is also a significant seller/servicer and
provided 20% of our single-family mortgage purchase volume during the year ended December 31, 2008. Given the
uncertainty of the current housing market we have entered into arrangements with existing customers at their renewal dates
that allow us to change credit and pricing terms faster than in the past. These arrangements, as well as significant customer
consolidation discussed above, may increase volatility of mortgage purchase and securitization volume with these customers
in the future.
In addition, we are exposed to risk from our mortgage seller/servicers for credit losses realized on mortgages. In order
to manage this risk, we rely on primary mortgage insurance, our right to demand repurchase of mortgages that are
inconsistent with representations and warranties made by seller/servicers when we purchased the loans, and, to a lesser
extent, recourse agreements (under which we may require a lender to repurchase delinquent loans) and indemnification
agreements (under which we may require a lender to reimburse us for credit losses on mortgages), as well as pool insurance.
During the twelve months ended December 31, 2008, our top three multifamily lenders, Capmark Finance Inc., Merrill
Lynch Capital Services, Inc. and CBRE Melody & Company, each accounted for more than 10% of our mortgage purchase
volume, and represented approximately 40% of our multifamily purchase volume. These top lenders are among the largest
mortgage loan originators in the U.S. in the multifamily markets. We are exposed to the risk that we could lose purchase
volume to the extent these arrangements are terminated without replacement from other lenders.
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. For our exposure to mortgage insurers, we evaluate the recovery from insurance
policies for mortgage loans in our mortgage-related investments portfolio as well as loans underlying our PCs and Structured
Securities as part of the estimate of our loan loss reserves. At December 31, 2008, these insurers provided coverage, with
maximum loss limits of $67 billion, for $342 billion of unpaid principal balance in connection with our single-family
mortgage portfolio, excluding mortgage loans backing Structured Transactions. Our top three mortgage insurer
counterparties, Mortgage Guaranty Insurance Corporation (or MGIC), Radian Guaranty Inc. (or Radian) and Genworth
Mortgage Insurance Corporation (or Genworth), each accounted for more than 10% and collectively represented
approximately 65% of our overall mortgage insurance coverage at December 31, 2008. Recently, many mortgage insurers
have had financial difficulty and have received several downgrades in their credit rating by nationally recognized statistical
rating organizations. Triad Guaranty Insurance Corporation (or Triad), one of our mortgage insurance counterparties, ceased
issuing new insurance effective July 15, 2008. All of our remaining mortgage insurance counterparties received credit rating
downgrades during 2008 and, except for CMG Mortgage Insurance Co., all are rated below the AA rating category, based on
the S&P rating scale. To date, no mortgage insurer has failed to meet its obligations to us.
Bond Insurers
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 owned by the securitization trust issuing securities we purchase while secondary
policies are acquired directly by us. At December 31, 2008, we had coverage, including secondary policies on securities,
totaling $16 billion of unpaid principal balance. At December 31, 2008, the top four of our bond insurers, Ambac Assurance
Corporation, Financial Guaranty Insurance Company, MBIA Insurance Corp., and Financial Security Assurance Inc., each
accounted for more than 10% of our overall bond insurance coverage and collectively represented approximately 90% of our
total coverage. Four of our bond insurers have had their credit rating downgraded below investment grade by at least one
major rating agency.
We evaluate the recovery from primary monoline bond insurance policies as part of our impairment analysis for our
investments in securities. We recognized significant impairment losses on certain of these securities covered by bond
insurance during the second, third and fourth quarters of 2008. If a monoline bond insurer fails to meet its obligations on
securities in our mortgage-related investments portfolio, then the fair values of our securities would further decline and result
in additional financial losses to us, which could have a material adverse effect on our results and financial condition. To date,
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