Concentrations of Credit Risk

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 48% of our single-family guaranty book of business as of March 31, 2014, compared with approximately 49% as of December 31, 2013. Our ten largest multifamily mortgage servicers, including their affiliates, serviced approximately 66% of our multifamily guaranty book of business as of March 31, 2014, compared with approximately 65% as of December 31, 2013.

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 $103.3 billion and $102.5 billion on the single-family mortgage loans in our guaranty book of business as of March 31, 2014 and December 31, 2013, respectively, which represented 4% of our single-family guaranty book of business as of March 31, 2014 and December 31, 2013. Our primary mortgage insurance coverage risk in force was $102.2 billion and $101.4 billion as of March 31, 2014 and December 31, 2013, respectively. Our pool mortgage insurance coverage risk in force was $1.0 billion and $1.1 billion as of March 31, 2014 and December 31, 2013, respectively. Our top four mortgage insurance companies provided 79% and 78% of our mortgage insurance as of March 31, 2014 and December 31, 2013, 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. These three mortgage insurers provided a combined $14.2 billion, or 14%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of March 31, 2014.

Effective March 7, 2014, PMI increased its cash payments on policyholder claims from 55% to 67%, and paid sufficient amounts of its outstanding deferred payment obligations to bring payment on those claims to 67%. It is uncertain whether PMI 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 has improved, there is still risk that our mortgage insurer 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.

When we estimate the credit losses that are inherent in our mortgage loans and under the terms of our guaranty obligations we also consider the recoveries that we will receive on primary mortgage insurance, as mortgage insurance recoveries would reduce the severity of the loss associated with defaulted loans. We evaluate the financial condition of our mortgage insurer counterparties and adjust the contractually due recovery amounts to ensure that only probable losses as of the balance sheet date are included in our loss reserve estimate. As a result, if our assessment of one or more of our mortgage insurer counterparties’ ability to fulfill their respective obligations to us worsens, it could result in an increase in our loss reserves.

The following table displays the amount by which our estimated benefit from mortgage insurance as of March 31, 2014 and December 31, 2013 reduced our total loss reserves as of those dates.



	As of
	March 31, 2014			December 31, 2013
		(Dollars in millions)
Contractual mortgage insurance benefit		$	6,400		$	6,751
Less: Collectibility adjustment⁽¹⁾		409			431
Estimated benefit included in total loss reserves		$	5,991		$	6,320

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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 $2.0 billion recorded in “Other assets” in our condensed consolidated balance sheets as of March 31, 2014 and $2.1 billion as of December 31, 2013 related to amounts claimed on insured, defaulted loans excluding government insured loans. Of this amount, $310 million as of March 31, 2014 and $402 million as of December 31, 2013 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 $621 million as of March 31, 2014 and $655 million as of December 31, 2013. The valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of March 31, 2014 and December 31, 2013.

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 $1.4 billion for the three months ended March 31, 2014 and $2.1 billion for three months ended March 31, 2013.

For information on credit risk associated with our derivative transactions and repurchase agreements refer to “Note 9, Derivative Instruments” and “Note 15, Netting Arrangements.”