Freddie Mac 2009 Annual Report Download - page 192

risk for 2009 and 2008, respectively, offsetting changes attributable to interest-rate risk. The gains and losses attributable to
changes in instrument-specific credit risk related to our multifamily held-for-sale loans were determined primarily from the
changes in OAS level.
We also consider credit risk in the valuation of our derivative positions. For derivatives that are in an asset position, we
hold collateral against those positions in accordance with agreed upon thresholds. The fair value of derivative assets
considers the impact of institutional credit risk in the event that the counterparty does not honor its payment obligation. The
amount of collateral held depends on the credit rating of the counterparty and is based on our credit risk policies. See “RISK
MANAGEMENT — Credit Risks — Institutional Credit Risk — Derivative Counterparties” for a discussion of our
counterparty credit risk. Similarly, for derivatives that are in a liability position we post collateral to counterparties in
accordance with agreed upon thresholds.
For a description of how we determine the fair value of our guarantee asset, see “NOTE 4: RETAINED INTERESTS
IN MORTGAGE-RELATED SECURITIZATIONS” to our consolidated financial statements. At December 31, 2009 and
2008, the total unpaid principal balance of PCs and Structured Securities outstanding was $1.9 trillion and $1.8 trillion,
respectively. At December 31, 2009 and 2008, we owned $374.6 billion and $424.5 billion, respectively, of PCs and
Structured Securities, or 20% and 23%, respectively, of the total PCs and Structured Securities outstanding. There are
inherent limitations when trying to extrapolate an amount of the total fair value of the guarantee asset and obligation
attributable to the PCs and Structured Securities we own. The credit performance of each pool differs, based on the
underlying characteristics of the loans, vintage, seasoning, and other factors that cannot be accurately factored into a pro-rata
allocation. As a result, a simple pro-rata allocation of the fair value of our guarantee asset and obligation based on the
percentage of PCs and Structured Securities we hold relative to total PCs and Structured Securities outstanding will not
necessarily provide a reasonable proxy for the adjustment to the fair value of our PCs and Structured Securities necessary to
derive the fair value of an unguaranteed security.
Our valuation process and related fair value hierarchy assessments require us to make judgments regarding the liquidity
of the marketplace. These judgments are based on the volume of securities traded in the marketplace, the width of bid/ask
spreads and dispersion of prices on similar securities. As previously mentioned, we have observed a significant reduction in
liquidity within the non-agency mortgage-related security markets. We continue to utilize the prices provided to us by
various pricing services and dealers and believe that the procedures executed by the pricing services and dealers, combined
with our internal verification process, ensure that the prices used to develop the financial statements are in accordance with
the guidance in the accounting standards for fair value measurements and disclosures.
We periodically evaluate our valuation techniques and may change them to improve our fair value estimates, to
accommodate market developments or to compensate for changes in data availability and reliability or other operational
constraints. We review a range of market quotes from pricing services or dealers and perform analysis of internal valuations
on a monthly basis to confirm the reasonableness of the valuations. See “QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks” for a discussion of market risks
and our interest-rate sensitivity measures, PMVS and duration gap. In addition, see “NOTE 4: RETAINED INTERESTS IN
MORTGAGE-RELATED SECURITIZATIONS” to our consolidated financial statements for a sensitivity analysis of the fair
value of our guarantee asset and other retained interests and the key assumptions utilized in fair value measurements.
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