Freddie Mac 2011 Annual Report Download - page 155

HFA bonds guaranteed by us under the HFA initiative. Freddie Mac securities backed by Ginnie Mae Certificates and
HFA bonds guaranteed by us under the HFA initiative are excluded because we consider the incremental credit risk to
which we are exposed to be insignificant.
We had recoveries (excluding reimbursements for our expenses) of $2.8 billion and $3.4 billion that reduced our
charge-offs of single-family loans during the years ended December 31, 2011 and 2010, respectively. These amounts
include $1.8 billion and $2.1 billion during the years ended December 31, 2011 and 2010, respectively, in recoveries
associated with our primary and pool mortgage insurance policies and other credit enhancements. We had additional
recoveries from credit enhancements that provided reimbursement for and reduced our expenses by $0.3 billion during
both 2011 and 2010. During 2011 and 2010, the credit enhancement coverage for our single-family loan purchases was
lower than in periods before 2009 and earlier, primarily as a result of high refinance activity. Refinance loans (other than
relief refinance mortgages) typically have lower LTV ratios, and are more likely to have an LTV ratio below 80% and not
require credit protection as specified in our charter. In addition, we have been purchasing significant amounts of relief
refinance mortgages. These mortgages allow for the refinance of existing loans guaranteed by us under terms such that we
may not have mortgage insurance for some or all of the UPB of the mortgage in excess of 80% of the value of the
property for certain of these loans.
Our ability and desire to expand or reduce the portion of our total mortgage portfolio covered by credit
enhancements will depend on: (a) our evaluation of the credit quality of new business purchase opportunities; (b) the risk
profile of our portfolio; (c) the credit worthiness of potential counterparties; and (d) the future availability of effective
credit enhancements at prices that permit an attractive return. While the use of credit enhancements reduces our exposure
to mortgage credit risk, it increases our exposure to institutional credit risk. As guarantor, we remain responsible for the
payment of principal and interest if mortgage insurance or other credit enhancements do not provide full reimbursement
for covered losses. Our credit losses could increase if an entity that provides credit enhancement fails to fulfill its
obligation, as this would reduce the amount of our credit loss recoveries.
Primary mortgage insurance is the most prevalent type of credit enhancement protecting our single-family credit
guarantee portfolio and is typically provided on a loan-level basis. Primary mortgage insurance transfers varying portions
of the credit risk associated with a mortgage to a third-party insurer. Generally, in order to file a claim under a primary
mortgage insurance policy, the insured loan must be in default and the borrower’s interest in the underlying property must
have been extinguished, such as through a foreclosure action. The mortgage insurer has a prescribed period of time within
which to process a claim and make a determination as to its validity and amount.
Other prevalent types of credit enhancements that we use are lender recourse (under which we may require a lender
to repurchase a loan upon default) and indemnification agreements (under which we may require a lender to reimburse us
for credit losses realized on mortgages), as well as pool insurance. Pool insurance provides insurance on a pool of loans
up to a stated aggregate loss limit. In addition to a pool-level loss coverage limit, some pool insurance contracts may have
limits on coverage at the loan level. In certain instances, the cumulative losses we have incurred as of December 31, 2011
combined with our expectations of potential future claims may exceed the maximum limit of loss allowed by the policy.
In order to file a claim under a pool insurance policy, we generally must have finalized the primary mortgage claim,
disposed of the foreclosed property, and quantified the net loss payable to us with respect to the insured loan to determine
the amount due under the pool insurance policy. Certain pool insurance policies have specified loss deductibles that must
be met before we are entitled to recover under the policy. We have institutional credit risk relating to the potential
insolvency or non-performance of mortgage insurers that insure mortgages we purchase or guarantee. See “Institutional
Credit Risk — Mortgage Insurers” for further discussion about pool insurance coverage and our mortgage loan insurers.
Certain of our single-family Other Guarantee Transactions utilize subordinated security structures as a form of credit
enhancement. At December 31, 2011 and 2010, the UPB of single-family Other Guarantee Transactions with
subordination coverage at origination was $3.3 billion and $3.9 billion, and the subordination coverage on these securities
was $647 million and $825 million, respectively. At December 31, 2011 and 2010, the average serious delinquency rate
on single-family Other Guarantee Transactions with subordination coverage was 20.9% and 21.1%, respectively.
See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for additional information about credit
protection and other forms of credit enhancements covering loans in our single-family credit guarantee portfolio as of
December 31, 2011 and December 31, 2010.
Other Credit Risk Management Activities
To compensate us for higher levels of risk in some mortgage products, we may charge upfront delivery fees above a
base management and guarantee fee, which are calculated based on credit risk factors such as the mortgage product type,
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