Concentrations of Credit Risk

Mortgage Sellers/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 sellers/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 approximately 51% of our single-family guaranty book of business as of June 30, 2013, compared with approximately 57% as of December 31, 2012. Our ten largest multifamily mortgage servicers, including their affiliates, serviced approximately 66% of our multifamily guaranty book of business as of June 30, 2013, compared with approximately 67% as of December 31, 2012.

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

Mortgage Insurers. Mortgage insurance “risk in force” generally represents our maximum potential loss recovery under the applicable mortgage insurance policies. We had total mortgage insurance coverage risk in force of $94.6 billion and $91.7 billion on the single-family mortgage loans in our guaranty book of business as of June 30, 2013 and December 31, 2012, respectively, which represented 3% of our single-family guaranty book of business as of June 30, 2013 and December 31, 2012. Our primary mortgage insurance coverage risk in force was $93.6 billion and $90.5 billion as of June 30, 2013 and December 31, 2012, respectively. Our pool mortgage insurance coverage risk in force was $1.0 billion and $1.2 billion as of June 30, 2013 and December 31, 2012, respectively. Our top six mortgage insurance companies provided 92% and 93% of our mortgage insurance as of June 30, 2013 and December 31, 2012, respectively.

Of our primary mortgage insurers, PMI Mortgage Insurance Co. (“PMI”), Republic Mortgage Insurance Company (“RMIC”) and Triad Guaranty Insurance Corporation (“Triad”) are under various forms of supervised control by their state regulators and are in run-off. These three mortgage insurers provided a combined $16.3 billion, or 17%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of June 30, 2013.

Genworth Mortgage Insurance Corporation (“Genworth”) is currently operating pursuant to waivers of state regulatory capital requirements applicable to its main insurance writing entity, as its capital had fallen below applicable state regulatory capital requirements. In July 2013, Genworth estimated that the risk-to-capital ratio of its main insurance writing entity had improved as of June 30, 2013, due in part to an additional capital contribution it received in April 2013 pursuant to its capital plan. The improvement in Genworth’s risk-to-capital ratio is expected to result in its meeting the regulatory capital requirements of all or most jurisdictions where it conducts business. Genworth’s regulators will determine whether it is in compliance with its regulatory capital requirements. Mortgage Guaranty Insurance Corporation (“MGIC”) and Radian Guaranty, Inc. (“Radian”) announced that they received additional capital contributions in March 2013. As of June 30, 2013, both MGIC and Radian met the capital requirements where they conduct business.

Although the financial condition of some of our mortgage insurer counterparties continued to improve, there is still significant 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 collectibility in order to ensure that our total loss reserves reflect probable losses as of the balance sheet date. The following table displays the amount by which our estimated benefit from mortgage insurance as of June 30, 2013 and December 31, 2012 reduced our total loss reserves as of those dates.



		As of
	June 30, 2013			December 31, 2012
		(Dollars in millions)
Contractual mortgage insurance benefit		$	7,858		$	9,993
Less: Collectibility adjustment⁽¹⁾		515			708
Estimated benefit included in total loss reserves		$	7,343		$	9,285

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⁽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 $2.6 billion recorded in “Other assets” in our condensed consolidated balance sheets as of June 30, 2013 and $3.7 billion as of December 31, 2012 related to amounts claimed on insured, defaulted loans, of which $576 million as of June 30, 2013 and $1.1 billion as of December 31, 2012 was due from our mortgage sellers/servicers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $578 million as of June 30, 2013 and $551 million as of December 31, 2012. The valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of June 30, 2013 and December 31, 2012. We received proceeds from mortgage insurers (and, in cases where policies were rescinded or canceled or coverage was denied by the mortgage insurer, from mortgage sellers/servicers) for single-family loans of $1.2 billion and $3.3 billion for the three and six months ended June 30, 2013, respectively, and $1.2 billion and $2.5 billion for three and six months ended June 30, 2012, respectively.

For information on credit risk associated with our derivative transactions and repurchase agreements refer to “Note 15, Netting Arrangements.”