Concentrations of Credit Risk

9 Months Ended

Sep. 30, 2012

Risks and Uncertainties [Abstract]

Concentrations of Credit Risk

Concentration of Credit Risk

Mortgage Seller/Servicers.  Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required activities on our behalf. Our mortgage seller/servicers are also obligated to repurchase loans or foreclosed properties, or reimburse us for losses if the foreclosed property has been sold, under certain circumstances, such as if it is determined that the mortgage loan did not meet our underwriting or eligibility requirements, if loan representations and warranties are violated or if mortgage insurers rescind coverage. Our business with mortgage servicers is concentrated. Our five largest single-family mortgage servicers, including their affiliates, serviced 59% of our single-family guaranty book of business as of September 30, 2012, compared with 63% as of December 31, 2011. Our ten largest multifamily mortgage servicers, including their affiliates, serviced 68% of our multifamily guaranty book of business as of September 30, 2012, compared with 67% as of December 31, 2011.

If a significant seller/servicer counterparty, or a number of seller/servicers fails to meet its obligations to us, it could result in a significant increase in our credit losses and have a material adverse affect on our results of operations, liquidity, financial condition and net worth.

Mortgage Insurers.  Mortgage insurance “risk in force” represents our maximum potential loss recovery under the applicable mortgage insurance policies. We had total mortgage insurance coverage risk in force of $90.5 billion and $91.2 billion on the single-family mortgage loans in our guaranty book of business as of September 30, 2012 and December 31, 2011, which represented 3% of our single-family guaranty book of business. Our primary mortgage insurance coverage risk in force was $89.1 billion and $87.3 billion as of September 30, 2012 and December 31, 2011. Our pool mortgage insurance coverage risk in force was $1.5 billion and $3.9 billion as of September 30, 2012 and December 31, 2011, respectively. Our top six mortgage insurance companies provided 93% and 94% of our mortgage insurance as of September 30, 2012 and December 31, 2011, respectively.

As of November 7, 2012, of our largest primary mortgage insurers: PMI Mortgage Insurance Co. (“PMI”), Triad Guaranty Insurance Corporation (“Triad”) and Republic Mortgage Insurance Company (“RMIC”) are in run-off and PMI is also in receivership; Genworth Mortgage Insurance Corporation (“Genworth”) and Mortgage Guaranty Insurance Corporation (“MGIC”) are operating pursuant to waivers they received from their regulators of the state regulatory capital requirements applicable to their main insurance writing entity, as the capital of each entity has fallen below applicable state regulatory capital requirements; and Radian Guaranty, Inc. (“Radian”) has disclosed that, in the absence of additional capital contributions to its main insurance writing entity, its capital might fall below state regulatory capital requirements in the future. These six mortgage insurers provided a combined $70.4 billion, or 78%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of September 30, 2012.

The current weakened financial condition of our mortgage insurer counterparties creates an increased risk that these counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies. If we determine that it is probable that we will not collect all of our claims from one or more of these mortgage insurer counterparties, it could result in an increase in our loss reserves, which could adversely affect our earnings, liquidity, financial condition and net worth.

Our total loss reserves incorporate an estimated recovery amount from mortgage insurance coverage. We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due mortgage insurance benefit for collectability in order to ensure that our total loss reserves reflect probable losses as of the balance sheet date. The following table displays our estimated benefit from mortgage insurers as of September 30, 2012 and December 31, 2011 that reduce our total loss reserves.

		As of
	September 30, 2012			December 31, 2011
		(Dollars in millions)
Contractual mortgage insurance benefit		$	10,681		$	15,099
Less: Collectability adjustment(1)		1,823			2,867
Estimated benefit included in total loss reserves		$	8,858		$	12,232

__________

⁽¹⁾  Represents an adjustment that reduces the contractual benefit for our assessment of our mortgage insurer counterparties’ inability to fully pay the contractual mortgage insurance claims.

We had outstanding receivables of $3.8 billion recorded in “Other assets” in our condensed consolidated balance sheets as of September 30, 2012 and $3.6 billion as of December 31, 2011 related to amounts claimed on insured, defaulted loans that we have not yet received, of which $1.1 billion as of September 30, 2012 and $639 million as of December 31, 2011 was due from our mortgage seller/servicers. We assessed the total outstanding receivables for collectability, and they are recorded net of a valuation allowance of $881 million as of September 30, 2012 and $570 million as of December 31, 2011. The valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of September 30, 2012 and December 31, 2011.

We received proceeds under our primary and pool mortgage insurance policies for single-family loans of $1.1 billion and $3.6 billion for the three and nine months ended September 30, 2012, respectively, and $1.4 billion and $4.6 billion for the three and nine months ended September 30, 2011, respectively.

Derivatives Counterparties. For information on credit risk associated with our derivatives transactions refer to “Note 9, Derivative Instruments.”