Concentrations of Credit Risk

6 Months Ended

Jun. 30, 2018

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 multifamily 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
	June 30, 2018⁽¹⁾						December 31, 2017⁽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⁾	1.14	%	0.29	%	0.90	%	1.42	%	0.43	%	1.15	%
Percentage of single-family conventional loans⁽⁴⁾	1.34		0.34		0.97		1.63		0.50		1.24



	As of
	June 30, 2018⁽¹⁾				December 31, 2017⁽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%	1	%	11.41	%	1	%	11.70	%
Geographical distribution:
California	19		0.36		19		0.42
Florida	6		2.51		6		3.71
New Jersey	4		1.68		4		2.15
New York	5		1.66		5		2.02
All other states	66		0.88		66		1.09
Product distribution:
Alt-A	2		4.21		2		4.95
Vintages:
2004 and prior	3		3.00		4		3.28
2005-2008	6		5.54		6		6.55
2009-2018	91		0.41		90		0.53

__________


⁽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 June 30, 2018 and December 31, 2017.


⁽²⁾	Consists of single-family conventional loans that were 90 days or more past due or in the foreclosure process as of June 30, 2018 and December 31, 2017.


⁽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
	June 30, 2018 ⁽¹⁾⁽²⁾				December 31, 2017⁽¹⁾⁽²⁾
	30 Days Delinquent		Seriously Delinquent⁽³⁾		30 Days Delinquent		Seriously Delinquent⁽³⁾
Percentage of multifamily guaranty book of business	0.01	%	0.10	%	0.03	%	0.11	%



	As of
	June 30, 2018				December 31, 2017
	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%	1	%	0.19	%	2	%	0.21	%
Less than or equal to 80%	99		0.10		98		0.11
Current DSCR less than 1.0⁽⁵⁾	2		3.25		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 June 30, 2018 and December 31, 2017, 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 Insurers. Mortgage insurance “risk in force” refers to our maximum potential loss recovery under the applicable mortgage insurance policies in force and is generally based on the loan level insurance coverage percentage and, if applicable, any aggregate pool loss limit, as specified in the policy.

The following table displays our total mortgage insurance risk in force by primary and pool insurance, as well as the total risk in force mortgage insurance coverage as a percentage of the single-family guaranty book of business.



	As of
	June 30, 2018			December 31, 2017
	Risk in Force		Percentage of Single-Family Guaranty Book of Business	Risk in Force		Percentage of Single-Family Guaranty Book of Business
	(Dollars in millions)
Mortgage insurance risk in force:
Primary mortgage insurance	$	144,023		$	137,941
Pool mortgage insurance	432			519
Total mortgage insurance risk in force	$	144,455	5%	$	138,460	5%

The table below displays our mortgage insurer counterparties that provided approximately 10% or more of the risk in force mortgage insurance coverage on the single-family loans in our guaranty book of business.



	Percentage of Total Risk in Force Mortgage Insurance Coverage
	As of
	June 30, 2018		December 31, 2017
Counterparty:⁽¹⁾
Arch Capital Group Ltd.⁽²⁾	25	%	25	%
Radian Guaranty, Inc.	21		21
Mortgage Guaranty Insurance Corp.	19		19
Genworth Mortgage Insurance Corp.	15		15
Essent Guaranty, Inc.	11		11
Others	9		9
Total	100	%	100	%

__________


⁽¹⁾	Insurance coverage amounts provided for each counterparty may include coverage provided by affiliates and subsidiaries of the counterparty.


⁽²⁾	Arch Capital Group Ltd. is the parent company of Arch Mortgage Insurance Co. and United Guaranty Residential Insurance Co.

Three of our mortgage insurer counterparties that are currently not approved to write new business are in run-off: PMI Mortgage Insurance Co. (“PMI”), Triad Guaranty Insurance Corporation (“Triad”) and Republic Mortgage Insurance Company (”RMIC”). 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 $5.4 billion, or 4%, of our risk in force mortgage insurance coverage of our single-family guaranty book of business as of June 30, 2018.

PMI and Triad have been paying only a portion of policyholder claims and deferring the remaining portion. PMI is currently paying 72.5% of claims under its mortgage insurance policies in cash and is deferring the remaining 27.5%, and Triad is currently paying 75% of claims in cash and deferring the remaining 25%. It is uncertain whether PMI or 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. RMIC is no longer deferring payments on policyholder claims and has paid us its previously outstanding deferred payment obligations as well as interest on those obligations; however, RMIC remains in run-off.

We have counterparty credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that insure single-family loans we purchase or guarantee. There is 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 increase 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 increase our combined loss reserves. As of June 30, 2018 and December 31, 2017, the amount by which our estimated benefit from mortgage insurance reduced our combined loss reserves was $833 million and $989 million, respectively.

We had outstanding receivables of $792 million recorded in “Other assets” in our condensed consolidated balance sheets as of June 30, 2018 and $858 million as of December 31, 2017 related to amounts claimed on insured, defaulted loans excluding government-insured loans. Of this amount, $47 million as of June 30, 2018 and $75 million as of December 31, 2017 was due from our mortgage servicers or sellers. We assessed the total outstanding receivables for collectibility, and they are recorded net of a valuation allowance of $568 million as of June 30, 2018 and $593 million as of December 31, 2017. The valuation allowance reduces our claim receivable to the amount which is considered probable of collection as of June 30, 2018 and December 31, 2017.

Mortgage Servicers and Sellers. 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 servicers and sellers 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. The table below displays the percentage of our single-family guaranty book of business serviced by our top five depository single-family mortgage servicers and top five non-depository single-family mortgage servicers, and identifies one servicer that serviced more than 10% of our single-family guaranty book of business.



	Percentage of Single-Family Guaranty Book of Business
	As of
	June 30, 2018		December 31, 2017
Wells Fargo Bank, N.A. (together with its affiliates)	18	%	18	%
Remaining top five depository servicers	16		17
Top five non-depository servicers	21		20
Total	55	%	55	%

The table below displays the percentage of our multifamily guaranty book of business serviced by our top five multifamily mortgage servicers, and identifies two servicers that serviced 10% or more of our multifamily guaranty book of business.



	Percentage of Multifamily Guaranty Book of Business
	As of
	June 30, 2018		December 31, 2017
Wells Fargo Bank, N.A. (together with its affiliates)	14	%	14	%
Walker & Dunlop, LLC	11		12
Remaining top five servicers	23		22
Total	48	%	48	%

If a significant mortgage servicer or seller counterparty, or a number of mortgage servicers or sellers, fails to meet their obligations to us, it could increase our credit losses and credit-related expense, and adversely affect our results of operations and financial condition.

For information on credit risk associated with our derivative transactions and repurchase agreements see “Note 8, Derivative Instruments” and “Note 12, Netting Arrangements.”