Freddie Mac 2009 Annual Report Download - page 215

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac was chartered by the U.S. Congress in 1970 to stabilize the nation’s residential mortgage market and
expand opportunities for home ownership and affordable rental housing. Our statutory mission is to provide liquidity,
stability and affordability to the U.S. housing market. Our participation in the secondary mortgage market includes providing
our credit guarantee for residential mortgages originated by mortgage lenders and investing in mortgage loans and mortgage-
related securities. Through our credit guarantee activities, we securitize mortgage loans by issuing PCs to third-party
investors. We also resecuritize mortgage-related securities that are issued by us or Ginnie Mae as well as private, or non-
agency, entities by issuing Structured Securities to third-party investors. We also guarantee multifamily mortgage loans that
support housing revenue bonds issued by third parties and we guarantee other mortgage loans held by third parties.
Securitized mortgage-related assets that back PCs and Structured Securities that are held by third parties are not reflected as
assets on our consolidated balance sheets. As discussed in “Securitization Activities through Issuances of Guaranteed PC and
Structured Securities,” our Structured Securities represent beneficial interests in pools of PCs and certain other types of
mortgage-related assets. We earn management and guarantee fees for providing our guarantee and performing management
activities (such as ongoing trustee services, administration of pass-through amounts, paying agent services, tax reporting and
other required services) with respect to issued PCs and Structured Securities. Our management activities are essential to and
inseparable from our guarantee activities. We do not provide or charge for the activities separately. The management and
guarantee fee is paid to us over the life of the related PCs and Structured Securities and reflected in earnings as management
and guarantee income is accrued.
Basis of Presentation
Our financial reporting and accounting policies conform to GAAP. We are operating under the basis that we will realize
assets and satisfy liabilities in the normal course of business as a going concern and in accordance with the delegation of
authority from FHFA to our Board of Directors and management. Certain amounts in prior periods’ consolidated financial
statements have been reclassified to conform to the current presentation. We evaluate the materiality of identified errors in
the financial statements using both an income statement, or “rollover,” and a balance sheet, or “iron-curtain,” approach,
based on relevant quantitative and qualitative factors.
Net income (loss) includes certain adjustments to correct immaterial errors related to previously reported periods. For
2009, we evaluated subsequent events through February 23, 2010.
Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect (a) the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
(b) the reported amounts of revenues and expenses and gains and losses during the reporting period. Actual results could
differ from those estimates.
Our estimates and judgments include, but are not limited to the following:
• estimating fair value for a significant portion of assets and liabilities, including financial instruments and REO (See
“NOTE 18: FAIR VALUE DISCLOSURES” for a discussion of our fair value estimates);
• estimating the expected amounts of forecasted issuances of debt;
• establishing the allowance for loan losses on loans held-for-investment and the reserve for guarantee losses on PCs;
• applying the static effective yield method of amortizing our guarantee obligation into earnings based on forecasted
unpaid principal balances, which requires adjustment when significant changes in economic events cause a shift in the
pattern of our economic release from risk;
• applying the effective interest method, which requires estimates of the expected future amounts of prepayments of
mortgage-related assets;
• assessing when impairments should be recognized on investments in securities and LIHTC partnerships and the
subsequent accretion of security impairments using prospective amortization; and
• assessing the realizability of net deferred tax assets to determine our need for and amount of a valuation allowance.
During 2009, we enhanced our methodology for estimating the reserve for losses on mortgage loans held-for-investment
and the reserve for guarantee losses on PCs. These enhancements were made to reduce the number of adjustments that were
required in the previous process that arose as a result of dramatic changes in market conditions in recent periods. The new
process allows us to incorporate a greater number of loan characteristics by giving us the ability to better integrate into the
modeling process our understanding of home price changes at a more detailed level and forecast their impact on incurred
losses. Additionally, these changes allow us to better assess incurred losses of modified loans by incorporating specific
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