Freddie Mac 2009 Annual Report Download - page 252

Our analysis is conducted on a quarterly basis and is subject to change as new information regarding delinquencies,
severities, loss timing, prepayments and other factors becomes available. While it is reasonably possible that, under certain
conditions, defaults and loss severities on our remaining available-for-sale securities for which we have not recorded an
impairment charge could exceed our subordination and credit enhancement levels and a principal or interest loss could occur,
we do not believe that those conditions were likely as of December 31, 2009.
In addition, we considered fair value at December 31, 2009, as well as, any significant changes in fair value since
December 31, 2009 to assess if they were indicative of potential future cash shortfalls. In this assessment, we put greater
emphasis on categorical pricing information than on individual prices. We use multiple pricing services and dealers to price
the majority of our non-agency mortgage-related securities. We observed significant dispersion in prices obtained from
different sources. However, we carefully consider individual and sustained price declines, placing greater weight when
dispersion is lower and less weight when dispersion is higher. Where dispersion is higher, other factors previously
mentioned, received greater weight.
Commercial Mortgage-Backed Securities
Commercial mortgage-backed securities are exposed to stresses in the commercial real estate market. We use external
models to identify securities which have an increased risk of failing to make their contractual payments. We then perform an
analysis of the underlying collateral on a security-by-security basis to determine whether we will receive all of the
contractual payments due to us. At December 31, 2009, 53% of our commercial mortgage-backed securities were AAA-rated
compared to 93% at December 31, 2008. We believe the declines in fair value are mainly attributable to the limited liquidity
and large risk premiums in the commercial mortgage-backed securities market consistent with the broader credit markets
rather than to the performance of the underlying collateral supporting the securities. We have identified six securities with a
combined unpaid principal balance of $1.6 billion that are expected to incur contractual losses, and have recorded other-
than-temporary impairment charges in earnings of $83 million during the fourth quarter of 2009. However, we view the
performance of these securities as significantly worse than the vast majority of our commercial mortgage-backed securities,
and while delinquencies for the remaining securities have increased, we believe the credit enhancement related to these
securities is currently sufficient to cover expected losses. Since we generally hold these securities to maturity, we do not
intend to sell these securities and it is not more likely than not that we will be required to sell such securities before
recovery of the unrealized losses.
Obligations of States and Political Subdivisions
These investments consist of mortgage revenue bonds. The unrealized losses on obligations of states and political
subdivisions are primarily a result of movements in interest rates and liquidity and risk premiums. We have concluded that
the impairment of these securities is temporary based on our conclusion that we do not intend to sell these securities and it
is not more likely than not that we will be required to sell such securities before a recovery of the unrealized losses, as well
as the extent and duration of the decline in fair value relative to the amortized cost and a lack of any other facts or
circumstances to suggest that the decline was other-than-temporary. The issuer guarantees related to these securities have led
us to conclude that any credit risk is minimal.
249 Freddie Mac