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Concentrations of Credit Risk
12 Months Ended
Dec. 31, 2013
Risks and Uncertainties [Abstract]  
Concentrations of Credit Risk
Concentrations of Credit Risk
Concentrations of credit risk arise when a number of customers and counterparties engage in similar activities or have similar economic characteristics that make them susceptible to similar changes in industry conditions, which could affect their ability to meet their contractual obligations. Based on our assessment of business conditions that could impact our financial results, we have determined that concentrations of credit risk exist among single-family and multifamily borrowers (including geographic concentrations and loans with certain higher-risk characteristics), mortgage sellers and servicers, mortgage insurers, financial guarantors, lenders with risk sharing, derivative counterparties and parties associated with our off-balance sheet transactions. Concentrations for each of these groups are discussed below.
Single-Family Loan Borrowers
Regional economic conditions may affect a borrower’s ability to repay his or her mortgage loan and the property value underlying the loan. Geographic concentrations increase the exposure of our portfolio to changes in credit risk. Single-family borrowers are primarily affected by home prices and interest rates. The geographic dispersion of our single-family business has been consistently diversified over the years ended December 31, 2013 and 2012, with our largest exposures in the Western region of the United States, which represented approximately 28% and 27% of our single-family conventional guaranty book of business as of December 31, 2013 and 2012, respectively. Except for California, where approximately 20% and 19% of the gross unpaid principal balance of our single-family conventional mortgage loans held or securitized in Fannie Mae MBS as of December 31, 2013 and 2012, respectively, were located, no other significant concentrations existed in any state.
To manage credit risk and comply with legal requirements, we typically require primary mortgage insurance or other credit enhancements if the current LTV ratio (i.e., the ratio of the unpaid principal balance of a loan to the current value of the property that serves as collateral) of a single-family conventional mortgage loan is greater than 80% when the loan is delivered to us. We may also require credit enhancements if the original LTV ratio of a single-family conventional mortgage loan is less than 80%.
Multifamily Loan Borrowers
Numerous factors affect a multifamily borrower’s ability to repay the loan and the value of the property underlying the loan. The most significant factors affecting credit risk are rental rates and capitalization rates for the mortgaged property. Rental rates vary among geographic regions of the United States. The average unpaid principal balance for multifamily loans is significantly larger than for single-family borrowers and, therefore, individual defaults for multifamily borrowers can result in more significant losses. However, these loans, while individually large, represent a small percentage of our total guaranty book of business. Our multifamily geographic concentrations have been consistently diversified over the years ended December 31, 2013 and 2012, with our largest exposure in the Western region of the United States, which represented 31% and 32% of our multifamily guaranty book of business as of December 31, 2013 and 2012, respectively. Except for California and New York, no other significant concentrations existed in any other states as of December 31, 2013 and 2012. As of December 31, 2013, 24% and 12% of the gross unpaid principal balance of multifamily mortgage loans held by us or securitized in Fannie Mae MBS were located in California and New York, respectively. As of December 31, 2012, 25% and 13% of the gross unpaid principal balance of multifamily mortgage loans held by us or securitized in Fannie Mae MBS were located in California and New York, respectively.
As part of our multifamily risk management activities, we perform detailed loan reviews that evaluate borrower and geographic concentrations, lender qualifications, counterparty risk, property performance and contract compliance. We generally require mortgage servicers to submit periodic property operating information and condition reviews, allowing us to monitor the performance of individual loans. We use this information to evaluate the credit quality of our portfolio, identify potential problem loans and initiate appropriate loss mitigation activities.
The following table displays the regional geographic concentration of single-family and multifamily loans in our guaranty book of business as of December 31, 2013 and 2012.
 
Geographic Concentration(1)
 
Percentage of Single-Family Conventional Guaranty Book of Business(2)
 
Percentage of Multifamily Guaranty Book of Business(3)
 
As of December 31,
 
As of December 31,
 
2013
 
2012
 
2013
 
2012
Midwest
 
15
%
 
 
15
%
 
 
9
%
 
 
8
%
Northeast
 
19
 
 
 
19
 
 
 
20
 
 
 
21
 
Southeast
 
22
 
 
 
23
 
 
 
21
 
 
 
21
 
Southwest
 
16
 
 
 
16
 
 
 
19
 
 
 
18
 
West
 
28
 
 
 
27
 
 
 
31
 
 
 
32
 
Total
 
100
%
 
 
100
%
 
 
100
%
 
 
100
%
__________
(1) 
Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT, VI; Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.
(2) 
Consists of the portion of our single-family conventional guaranty book of business for which we have detailed loan level information, which constituted over 99% of our total single-family conventional guaranty book of business as of December 31, 2013 and 2012.
(3) 
Consists of the portion of our multifamily guaranty book of business for which we have detailed loan level information, which constituted 99% of our total multifamily guaranty book of business as of December 31, 2013 and 2012.
Alt-A and Subprime Loans and Securities
We own and guarantee Alt-A and subprime mortgage loans and mortgage-related securities. An Alt-A mortgage loan generally refers to a mortgage loan that has been underwritten with reduced or alternative documentation than that required for a full documentation mortgage loan but may also include other alternative product features. As a result, Alt-A mortgage loans generally have a higher risk of default than non-Alt-A mortgage loans. In reporting our Alt-A exposure, we have classified mortgage loans as Alt-A if and only if the lenders that deliver the mortgage loans to us have classified the loans as Alt-A, based on documentation or other product features. We have classified private-label mortgage-related securities held in our investment portfolio as Alt-A if the securities were labeled as such when issued.
A subprime mortgage loan generally refers to a mortgage loan made to a borrower with a weaker credit profile than that of a prime borrower. As a result of the weaker credit profile, subprime borrowers have a higher likelihood of default than prime borrowers. Subprime mortgage loans were typically originated by lenders specializing in this type of business or by subprime divisions of large lenders, using processes unique to subprime loans. In reporting our subprime exposure, we have classified mortgage loans as subprime if and only if the loans were originated by a lender specializing in subprime business or by a subprime division of a large lender; however, we exclude loans originated by these lenders from the subprime classification if we acquired the loans in accordance with our standard underwriting criteria, which typically require compliance by the lender with our Selling Guide, which sets forth our policies and procedures related to selling single-family mortgages to us, (including standard representations and warranties) and/or evaluation of the loans through our Desktop Underwriter system.
We apply our classification criteria in order to discuss our exposure to subprime and Alt-A loans. However, there is no universally accepted definition of subprime or Alt-A loans. Our single-family conventional guaranty book of business includes loans with some features that are similar to Alt-A loans or subprime loans that we have not classified as Alt-A or subprime because they do not meet our classification criteria. We have classified private-label mortgage-related securities held in our retained mortgage portfolio as subprime if the securities were labeled as such when issued. We reduce our risk associated with some of these loans through credit enhancements, as described below under “Mortgage Insurers.” We do not rely solely on our classifications of loans as Alt-A or subprime to evaluate the credit risk exposure relating to these loans in our single-family conventional guaranty book of business. For more information about the credit risk characteristics of loans in our single-family guaranty book of business, see “Note 3, Mortgage Loans” and “Note 6, Financial Guarantees.”
The Alt-A mortgage loans and Fannie Mae MBS backed by Alt-A loans of $132.5 billion in unpaid principal balance represented 5% of our single-family mortgage credit book of business as of December 31, 2013, compared with $157.0 billion in unpaid principal balance which represented 5% of our single-family mortgage credit book of business as of December 31, 2012. Subprime mortgage loans, private-label securities backed by Alt-A loans and private-label securities backed by subprime mortgage loans each represented less than 1% of our single-family mortgage credit book of business as of December 31, 2013 and 2012.
Other Concentrations
Mortgage Sellers and 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 and 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 49% of our single-family guaranty book of business as of December 31, 2013, compared with approximately 57% as of December 31, 2012. Our ten largest multifamily mortgage servicers, including their affiliates, serviced approximately 65% of our multifamily guaranty book of business as of December 31, 2013, compared with approximately 67% as of December 31, 2012.
If a significant mortgage seller or servicer counterparty, or a number of mortgage sellers or servicers, fails to meet their obligations to us, it could result in a significant increase in our credit losses and credit-related expense, 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 $102.5 billion and $91.7 billion on the single-family mortgage loans in our guaranty book of business as of December 31, 2013 and 2012, respectively, which represented 4% and 3% of our single-family guaranty book of business as of December 31, 2013 and 2012, respectively. Our primary mortgage insurance coverage risk in force was $101.4 billion and $90.5 billion as of December 31, 2013 and 2012, respectively. Our pool mortgage insurance coverage risk in force was $1.1 billion and $1.2 billion as of December 31, 2013 and 2012, respectively. Our top six mortgage insurance companies provided 91% and 93% of our mortgage insurance as of December 31, 2013 and 2012, respectively.
Of our largest primary mortgage insurers, PMI Mortgage Insurance Co. (“PMI”), Triad Guaranty Insurance Corporation (“Triad”) and Republic Mortgage Insurance Company (“RMIC”) are under various forms of supervised control by their state regulators and are in run-off. Entering run-off may close off a source of profits and liquidity that may have otherwise assisted a mortgage insurer in paying claims under insurance policies, and could also cause the quality and speed of its claims processing to deteriorate. These three mortgage insurers provided a combined $14.8 billion, or 14%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of December 31, 2013.
PMI and RMIC have been paying only a portion of policyholder claims and deferring the remaining portion. Currently, PMI is paying 55% of claims under its mortgage insurance policies in cash and is deferring the remaining 45%, and RMIC is paying 60% of claims in cash and deferring the remaining 40%. It is uncertain when, or if, PMI or RMIC will be permitted to begin paying deferred policyholder claims and/or increase or decrease the amount of cash they pay on claims. Effective December 1, 2013, Triad increased its cash payments on policyholder claims from 60% to 75%, and paid sufficient amounts of its outstanding deferred payment obligations to bring payment on those claims to 75%. It is uncertain whether Triad will be permitted in the future to pay any remaining deferred policyholder claims and/or increase or decrease the amount of cash they pay on claims.
Although the financial condition of our mortgage insurer counterparties currently approved to write new business continued to improve in 2013, there is still risk that these counterparties may 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 results of operations, 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 December 31, 2013 and 2012 reduced our total loss reserves as of these dates.
 
As of December 31,
 
2013
 
2012
 
(Dollars in millions)
Contractual mortgage insurance benefit
 
$
6,751

 
 
 
$
9,993

 
Less: Collectibility adjustment(1)
 
431

 
 
 
708

 
Estimated benefit included in total loss reserves
 
$
6,320

 
 
 
$
9,285

 
__________
(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 $2.1 billion recorded in “Other assets” in our consolidated balance sheets as of December 31, 2013 and $3.7 billion as of December 31, 2012 related to amounts claimed on insured, defaulted loans excluding government insured loans. Of this amount, $402 million as of December 31, 2013 and $1.1 billion as of December 31, 2012 was due from our mortgage sellers or servicers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $655 million as of December 31, 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 December 31, 2013 and 2012.
We received proceeds from private mortgage insurers (and, in cases where policies were rescinded or canceled or coverage was denied by the mortgage insurer, from mortgage sellers or servicers) for single-family loans of $5.7 billion and $5.1 billion for the years ended December 31, 2013 and 2012, respectively.
Financial Guarantors.  We are the beneficiary of non-governmental financial guarantees on non-agency securities held in our retained mortgage portfolio and on non-agency securities that have been resecuritized to include a Fannie Mae guaranty and sold to third parties. The following table displays the total unpaid principal balance of guaranteed non-agency securities in our retained mortgage portfolio as of December 31, 2013 and 2012.
 
As of December 31,
 
2013
 
2012
 
(Dollars in millions)
Alt-A private-label securities
$
511

 
$
928

Subprime private-label securities
868

 
1,264

Mortgage revenue bonds
3,911

 
4,374

Other mortgage-related securities
264

 
292

Total
$
5,554

 
$
6,858


If a financial guarantor fails to meet its obligations to us with respect to the securities for which we have obtained financial guarantees, it could reduce the fair value of our mortgage-related securities and result in financial losses to us, which could have a material adverse effect on our earnings, liquidity, financial condition and net worth. With the exception of Ambac Assurance Corporation (“Ambac”), which is operating under a deferred payment obligation and is making cash payments equal to 25% of the claim, none of our remaining non-governmental financial guarantor counterparties has failed to repay us for claims under guaranty contracts. Ambac provided coverage on $2.5 billion, or 46%, of our total non-governmental guarantees as of December 31, 2013.
We are also the beneficiary of financial guarantees included in securities issued by Freddie Mac, the federal government and its agencies that totaled $22.5 billion as of December 31, 2013 and $27.3 billion as of December 31, 2012.
When assessing our securities for impairment, we consider the benefit of non-governmental financial guarantees from those guarantors that we determine are creditworthy, although we continue to seek collection of any amounts due to us from all counterparties. See “Note 5, Investments in Securities” for a further discussion of our model methodology and key inputs used to determine other-than-temporary impairments.
Lenders with Risk Sharing.  We enter into risk sharing agreements with lenders pursuant to which the lenders agree to bear all or some portion of the credit losses on the covered loans. Our maximum potential loss recovery from lenders under these risk sharing agreements on single-family loans was $10.7 billion as of December 31, 2013, compared with $11.9 billion as of December 31, 2012. As of December 31, 2013, 52% of our maximum potential loss recovery on single-family loans was from three lenders, compared with 55% as of December 31, 2012. Our maximum potential loss recovery from lenders under these risk sharing agreements on both Delegated Underwriting and Servicing (“DUS”) and non-DUS multifamily loans was $39.4 billion as of December 31, 2013, compared with $36.4 billion as of December 31, 2012. As of December 31, 2013, 32% of our maximum potential loss recovery on multifamily loans was from three DUS lenders, compared with 35% as of December 31, 2012.
Parties Associated with Our Off-Balance Sheet Transactions.  We enter into financial instrument transactions that create off-balance sheet credit risk in the normal course of our business. These transactions are designed to meet the financial needs of our customers, and manage our credit, market or liquidity risks.
We have entered into guarantees for which we have not recognized a guaranty obligation in our consolidated balance sheets relating to periods prior to 2003, the effective date of accounting guidance related to guaranty accounting. Our maximum potential exposure under these guarantees is $7.3 billion as of December 31, 2013 and $8.3 billion as of December 31, 2012. If we were required to make payments under these guarantees, we would pursue recovery through our right to the collateral backing the underlying loans, available credit enhancements and recourse with third parties that provide a maximum coverage of $3.1 billion as of December 31, 2013 and $3.6 billion as of December 31, 2012.
Derivatives Counterparties.  For information on credit risk associated with our derivative transactions and repurchase agreements refer to “Note 9, Derivative Instruments” and “Note 17, Netting Arrangements.”