Freddie Mac 2011 Annual Report Download - page 65

As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its
obligations to reimburse us for claims. Thus, if any of our mortgage insurers that provide credit enhancement fails to
fulfill its obligation, we could experience increased credit losses. In addition, if a regulator determined that a mortgage
insurer lacked sufficient capital to pay all claims when due, the regulator could take action that might impact the timing
and amount of claim payments made to us. We independently assess the financial condition, including the claims-paying
resources, of each of our mortgage insurers. Based on our analysis of the financial condition of a mortgage insurer and
pursuant to our eligibility requirements for mortgage insurers, we could take action against a mortgage insurer intended to
protect our interests that may impact the timing and amount of claims payments received from that insurer. We expect to
receive substantially less than full payment of our claims from Triad Guaranty Insurance Corp., Republic Mortgage
Insurance Company and PMI Mortgage Insurance Co. We also believe that certain other of our mortgage insurance
counterparties may lack sufficient ability to meet all their expected lifetime claims paying obligations to us as such claims
emerge.
In the event one or more of our bond insurers were to become insolvent, it is likely that we would not collect all of
our claims from the affected insurer. This would impact our ability to recover certain unrealized losses on our investments
in non-agency mortgage-related securities, and could contribute to net impairment of available-for-sale securities
recognized in earnings. We evaluate the expected recovery from primary bond insurance policies as part of our
impairment analysis for our investments in securities. If a bond insurer’s performance with respect to its obligations on
our investments in securities is worse than expected, this could contribute to additional net impairment of those securities.
In addition, the fair values of our securities may further decline, which could also have a material adverse effect on our
results and financial condition. We expect to receive substantially less than full payment from several of our bond
insurers, including Ambac Assurance Corporation and Financial Guaranty Insurance Company, due to adverse
developments concerning these companies. Ambac Assurance Corporation and Financial Guaranty Insurance Company are
currently not paying any of their claims. We believe that some of our other bond insurers may also lack sufficient ability
to fully meet all of their expected lifetime claims-paying obligations to us as such claims emerge.
For more information on developments concerning our mortgage insurers and bond insurers, see “MD&A — RISK
MANAGEMENT — Credit Risk — Institutional Credit Risk — Mortgage Insurers” and “— Bond Insurers.”
If mortgage insurers were to further tighten their standards or fall out of compliance with regulatory capital
requirements, the volume of high LTV ratio mortgages available for us to purchase could be reduced, which could
reduce our overall volume of new business. Mortgage insurance standards could constrain our future ability to
purchase loans with LTV ratios over 80%.
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
specified credit enhancements or participation interests. Our purchases of mortgages with LTV ratios above 80% (other
than relief refinance mortgages) have declined in recent years, in part because mortgage insurers tightened their eligibility
requirements with respect to the issuance of insurance on new mortgages with such higher LTV ratios. If mortgage
insurers further restrict their eligibility requirements for such loans, or if we are no longer willing or able to obtain
mortgage insurance from these counterparties under terms we find reasonable, and we are not able to avail ourselves of
suitable alternative methods of obtaining credit enhancement for these loans, we may be further restricted in our ability to
purchase or securitize loans with LTV ratios over 80% at the time of purchase. This could further reduce our overall
volume of new business. This could also negatively impact our ability to participate in a significant segment of the
mortgage market (i.e., loans with LTV ratios over 80%) should we seek, or be directed, to do so.
If a mortgage insurance company were to fall out of compliance with regulatory capital requirements and not obtain
appropriate waivers, it could become subject to regulatory actions that restrict its ability to write new business in certain,
or in some cases all, states. During the third quarter of 2011, Republic Mortgage Insurance Company and PMI Mortgage
Insurance Co. were prohibited from writing new business by their primary state regulators and neither writes new business
in any state any longer. Given the difficulties in the mortgage insurance industry, we believe it is likely that other
companies may be unable to meet regulatory capital requirements.
A mortgage insurer may attempt a corporate restructuring designed to enable it to continue to write new business
through a new entity in the event the insurer falls out of compliance with regulatory capital requirements. However, there
can be no assurance that an insurer would be able to accomplish such a restructuring, as the restructured entity would be
required to satisfy regulatory requirements as well as our own conditions. These restructuring plans generally involve
contributing capital to a subsidiary or affiliate. This could result in less liquidity available to the existing mortgage insurer
to pay claims on its existing book of business, and an increased risk that the mortgage insurer would not pay its claims in
full in the future. We monitor the claim paying ability of our mortgage insurers. As these restructuring plans are presented
60 Freddie Mac