Financial Guarantees

12 Months Ended

Dec. 31, 2012

We generate revenue by absorbing the credit risk of mortgage loans in unconsolidated trusts in exchange for a guaranty fee. We also provide credit enhancements on taxable or tax-exempt mortgage revenue bonds issued by state and local governmental entities to finance multifamily housing for low- and moderate-income families. Additionally, we issue long-term standby commitments that generally require us to purchase loans from lenders if the loans meet certain delinquency criteria.

We recognize a guaranty obligation for our obligation to stand ready to perform on our guarantees to unconsolidated trusts and other guaranty arrangements. These guarantees expose us to credit losses on the mortgage loans or, in the case of mortgage-related securities, the underlying mortgage loans of the related securities. The contractual terms of our guarantees range from 30 days to 40 years; however, the actual term of each guaranty may be significantly less than the contractual term based on the prepayment characteristics of the related mortgage loans.

For those guarantees recognized in our consolidated balance sheets, our maximum potential exposure under these guarantees is primarily comprised of the unpaid principal balance of the underlying mortgage loans, which totaled $50.6 billion and $59.4 billion as of December 31, 2012 and 2011, respectively.

In addition, we had maximum potential exposure of $8.3 billion and $9.3 billion for other guarantees not recognized in our consolidated balance sheets as of December 31, 2012 and 2011, respectively, which primarily represents the unpaid principal balance of loans underlying guarantees issued prior to January 1, 2010, the effective date of current accounting guidance on guaranty accounting.

The maximum amount we could recover through available credit enhancements and recourse with third parties on guarantees recognized in our consolidated balance sheets was $13.3 billion and $14.1 billion as of December 31, 2012 and 2011, respectively. The maximum amount we could recover through available credit enhancements and recourse with third parties on guarantees not recognized in our consolidated balance sheets was $3.6 billion and $4.0 billion as of December 31, 2012 and 2011, respectively. Recoverability of such credit enhancements and recourse is subject to, among other factors, our mortgage insurers’ and financial guarantors’ ability to meet their obligations to us.

Risk Characteristics of our Book of Business

We gauge our performance risk under our guaranty based on the delinquency status of the mortgage loans we hold in portfolio, or in the case of mortgage-backed securities, the mortgage loans underlying the related securities.

For single-family loans, management monitors the serious delinquency rate, which is the percentage of single-family loans 90 days or more past due or in the foreclosure process, and loans that have higher risk characteristics, such as high mark-to-market LTV ratios.

For multifamily loans, management monitors the serious delinquency rate, which is the percentage of loans 60 days or more past due, and other loans that have higher risk characteristics, to determine our overall credit quality indicator. Higher risk characteristics include, but are not limited to, original debt service coverage ratios (“DSCR”) below 1.10, current DSCR below 1.0, and high original and current estimated LTV ratios. We stratify multifamily loans into different internal risk categories based on the credit risk inherent in each individual loan.

For single-family and multifamily loans, we use this information, in conjunction with housing market and economic conditions, to structure our pricing and our eligibility and underwriting criteria to reflect the current risk of loans with these higher-risk characteristics, and in some cases we decide to significantly reduce our participation in riskier loan product categories. Management also uses this data together with other credit risk measures to identify key trends that guide the development of our loss mitigation strategies.

The following tables display the current delinquency status and certain higher risk characteristics of our single-family conventional and total multifamily guaranty book of business as of December 31, 2012 and 2011.



	As of December 31,
	2012⁽¹⁾						2011⁽¹⁾
	30 Days Delinquent		60 Days Delinquent		Seriously Delinquent⁽²⁾		30 Days Delinquent		60 Days Delinquent		Seriously Delinquent⁽²⁾
Percentage of single-family conventional guaranty book of business⁽³⁾	1.75	%	0.63	%	3.66	%	1.98	%	0.73	%	4.47	%
Percentage of single-family conventional loans⁽⁴⁾	1.96		0.66		3.29		2.17		0.74		3.91



	As of December 31,
	2012⁽¹⁾				2011⁽¹⁾
	Percentage of Single-Family Conventional Guaranty Book of Business⁽³⁾		Percentage Seriously Delinquent⁽²⁾⁽⁵⁾		Percentage of Single-Family Conventional Guaranty Book of Business⁽³⁾		Percentage Seriously Delinquent⁽²⁾⁽⁵⁾
Estimated mark-to-market loan-to-value ratio:
Greater than 100%	13	%	13.42	%	18	%	13.76	%
Geographical distribution:
Arizona	2		2.14		2		3.65
California	19		1.69		19		2.46
Florida	6		10.06		6		11.80
Nevada	1		6.70		1		7.42
Select Midwest states⁽⁶⁾	10		3.51		10		4.39
All other states	62		2.85		62		3.18
Product distribution:
Alt-A	6		11.36		7		12.43
Subprime	*		20.60		*		23.18
Vintages:
2005	5		7.79		7		7.27
2006	5		12.15		7		11.81
2007	7		12.99		10		12.62
2008	5		6.63		7		5.64
All other vintages	78		1.36		69		1.59
Select combined risk characteristics:
Original LTV ratio > 90% and FICO score < 620	1		14.76		1		18.67

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*	Represents less than 0.5% of the single-family conventional guaranty book of business.


⁽¹⁾	Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level information, which constituted approximately 99% of our total single-family conventional guaranty book of business as of December 31, 2012 and 2011.


⁽²⁾	Consists of single-family conventional loans that were 90 days or more past due or in the foreclosure process as of December 31, 2012 and 2011.


⁽³⁾	Calculated based on the aggregate unpaid principal balance of single-family conventional loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business.


⁽⁴⁾	Calculated based on the number of single-family conventional loans that were delinquent divided by the total number of loans in our single-family conventional guaranty book of business.


⁽⁵⁾	Calculated based on the number of single-family conventional loans that were seriously delinquent divided by the total number of single-family conventional loans for each category included in our guaranty book of business.


⁽⁶⁾	Consists of Illinois, Indiana, Michigan, and Ohio.



	As of December 31,
	2012⁽¹⁾⁽²⁾				2011⁽¹⁾⁽²⁾
	30 Days Delinquent		Seriously Delinquent⁽³⁾		30 Days Delinquent		Seriously Delinquent⁽³⁾
Percentage of multifamily guaranty book of business	0.23	%	0.24	%	0.11	%	0.59	%



	As of December 31,
	2012⁽¹⁾				2011⁽¹⁾
	Percentage of Multifamily Guaranty Book of Business⁽²⁾		Percentage Seriously Delinquent⁽³⁾⁽⁴⁾		Percentage of Multifamily Guaranty Book of Business⁽²⁾		Percentage Seriously Delinquent⁽³⁾⁽⁴⁾
Original loan-to-value ratio:
Greater than 80%	4	%	0.36	%	5	%	2.51	%
Less than or equal to 80%	96		0.24		95		0.49
Original debt service coverage ratio:
Less than or equal to 1.10	8		0.22		8		0.24
Greater than 1.10	92		0.25		92		0.62
Current debt service coverage ratio less than 1.0⁽⁵⁾	5		2.11		7		3.66

__________


⁽¹⁾	Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information, which constituted approximately 99% of our total multifamily guaranty book of business as of December 31, 2012 and 2011 excluding loans that have been defeased.


⁽²⁾	Calculated based on the aggregate unpaid principal balance of multifamily loans for each category divided by the aggregate unpaid principal balance of loans in our multifamily guaranty book of business.


⁽³⁾	Consists of multifamily loans that were 60 days or more past due as of the dates indicated.


⁽⁴⁾	Calculated based on the unpaid principal balance of multifamily loans that were seriously delinquent divided by the aggregate unpaid principal balance of multifamily loans for each category included in our guaranty book of business.


⁽⁵⁾	Our estimates of current DSCRs are based on the latest available income information for these properties. Although we use the most recently available results of our multifamily borrowers, there is a lag in reporting, which typically can range from 6 to 12 months.

Fannie Mae MBS Included in Investments in Securities

For Fannie Mae MBS included in “Investments in securities” in our consolidated balance sheets, we do not eliminate or extinguish the guaranty arrangement because it is a contractual arrangement with the unconsolidated MBS trusts. We determine the fair value of Fannie Mae MBS based on observable market prices because most Fannie Mae MBS are actively traded. Fannie Mae MBS receive high credit quality ratings primarily because of our guaranty. Absent our guaranty, Fannie Mae MBS would be subject to the credit risk on the underlying loans. We continue to recognize a guaranty obligation and a reserve for guaranty losses associated with these securities because we carry these securities in our consolidated financial statements as guaranteed Fannie Mae MBS. The fair value of the guaranty obligation, net of deferred profit, associated with Fannie Mae MBS included in “Investments in securities” approximates the fair value of the credit risk that exists on these Fannie Mae MBS absent our guaranty. The fair value of our guaranty obligations associated with the Fannie Mae MBS included in “Investments in securities” was $1.8 billion and $2.2 billion as of December 31, 2012 and 2011, respectively.