Concentrations of Credit Risk

3 Months Ended

Mar. 31, 2017

Risk Characteristics of our Guaranty Book of Business

One of the measures by which we gauge our performance risk under our guaranty is the delinquency status of the mortgage loans we hold in our retained mortgage 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, based on unpaid principal balance, that are 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, current debt service coverage ratio (“DSCR”) below 1.0 and high original 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 delinquency status and serious delinquency rates for specified loan categories of our single-family conventional and total multifamily guaranty book of business.



	As of
	March 31, 2017⁽¹⁾						December 31, 2016⁽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⁾	1.03	%	0.29	%	1.10	%	1.30	%	0.36	%	1.18	%
Percentage of single-family conventional loans⁽⁴⁾	1.19		0.33		1.12		1.51		0.41		1.20



	As of
	March 31, 2017⁽¹⁾				December 31, 2016⁽¹⁾
	Percentage of Single-Family Conventional Guaranty Book of Business⁽³⁾		Seriously Delinquent Rate⁽²⁾		Percentage of Single-Family Conventional Guaranty Book of Business⁽³⁾		Seriously Delinquent Rate⁽²⁾
Estimated mark-to-market loan-to-value ratio:
Greater than 100%	2	%	10.07	%	2	%	10.44	%
Geographical distribution:
California	19		0.47		19		0.50
Florida	6		1.73		6		1.89
New Jersey	4		2.85		4		3.07
New York	5		2.48		5		2.65
All other states	66		1.04		66		1.11
Product distribution:
Alt-A	3		4.87		3		5.00
Vintages:
2004 and prior	4		2.76		5		2.82
2005-2008	8		6.15		8		6.39
2009-2017	88		0.34		87		0.36

__________


⁽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 March 31, 2017 and December 31, 2016.


⁽²⁾	Consists of single-family conventional loans that were 90 days or more past due or in the foreclosure process as of March 31, 2017 and December 31, 2016.


⁽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.



	As of
	March 31, 2017⁽¹⁾⁽²⁾				December 31, 2016⁽¹⁾⁽²⁾
	30 Days Delinquent		Seriously Delinquent⁽³⁾		30 Days Delinquent		Seriously Delinquent⁽³⁾
Percentage of multifamily guaranty book of business	0.01	%	0.05	%	0.02	%	0.05	%



	As of
	March 31, 2017⁽¹⁾				December 31, 2016⁽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 LTV ratio:
Greater than 80%	2	%	0.33	%	2	%	0.22	%
Less than or equal to 80%	98		0.04		98		0.05
Current DSCR less than 1.0⁽⁵⁾	1		2.11		2		1.96

__________


⁽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 March 31, 2017 and December 31, 2016, 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 3 to 6 months but in some cases may be longer.

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 may also be obligated to repurchase loans or foreclosed properties, reimburse us for losses or provide other remedies under certain circumstances, such as if it is determined that the mortgage loan did not meet our underwriting or eligibility requirements, if certain loan representations and warranties are violated or if mortgage insurers rescind coverage. However, under our revised representation and warranty framework, we no longer require repurchase for loans that have breaches of certain selling representations and warranties if they have met specified criteria for relief. Our business with mortgage servicers is concentrated. Our five largest single-family mortgage servicers, including their affiliates, serviced approximately 39% of our single-family guaranty book of business as of March 31, 2017 and December 31, 2016. Our five largest multifamily mortgage servicers, including their affiliates, serviced approximately 47% of our multifamily guaranty book of business as of March 31, 2017 and December 31, 2016.

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 an increase in our credit losses and credit-related expense, and have an adverse effect on our results of operations and financial condition.

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 $128.3 billion and $126.2 billion on the single-family mortgage loans in our guaranty book of business as of March 31, 2017 and December 31, 2016, respectively, which represented 4% of our single-family guaranty book of business as of March 31, 2017 and December 31, 2016. Our primary mortgage insurance coverage risk in force was $127.8 billion and $125.6 billion as of March 31, 2017 and December 31, 2016, respectively. Our pool mortgage insurance coverage risk in force was $591 million and $617 million as of March 31, 2017 and December 31, 2016, respectively. Our top three mortgage insurance companies provided 66% of our mortgage insurance coverage risk in force as of March 31, 2017 and December 31, 2016.

Of our largest primary mortgage insurers, PMI Mortgage Insurance Co., Triad Guaranty Insurance Corporation and Republic Mortgage Insurance Company 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 $7.6 billion, or 6%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of March 31, 2017.

Although the financial condition of our mortgage insurer counterparties currently approved to write new business has improved in recent years, there is still risk that these counterparties may fail to fulfill their obligations to pay our 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 our 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 combined loss reserves. As of March 31, 2017 and December 31, 2016, the amount by which our estimated benefit from mortgage insurance reduced our total combined loss reserves was $1.2 billion and $1.4 billion, respectively.

We had outstanding receivables of $1.0 billion recorded in “Other assets” in our condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016 related to amounts claimed on insured, defaulted loans excluding government insured loans. Of this amount, $104 million as of March 31, 2017 and $141 million as of December 31, 2016 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 $609 million as of March 31, 2017 and $638 million as of December 31, 2016. The valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of March 31, 2017 and December 31, 2016.

For information on credit risk associated with our derivative transactions and repurchase agreements refer to “Note 8, Derivative Instruments” and “Note 13, Netting Arrangements.”