Freddie Mac 2009 Annual Report Download - page 253

Other-Than-Temporary Impairments on Available-For-Sale Securities
Table 6.4 summarizes our net impairments of available-for-sale securities recognized in earnings by security type and
the duration of the unrealized loss prior to impairment of less than 12 months or 12 months or greater.
Table 6.4 — Net Impairment of Available-For-Sale Securities Recognized in Earnings by Gross Unrealized Loss
Position
(1)
Less than
12 Months
12 Months
or Greater Total
Less than
12 Months
12 Months
or Greater Total
Less than
12 Months
12 Months
or Greater Total
2009 2008 2007
Net Impairment of Available-For-Sale Securities Recognized in Earnings For the Year Ended December 31,
(in millions)
Mortgage-related securities:
Subprime . ............... $(1,110) $(5,416) $ (6,526) $ (168) $ (3,453) $ (3,621) $(11) $ — $ (11)
Option ARM .............. (775) (951) (1,726) — (7,602) (7,602) — — —
Alt-A and other . . . . ........ (820) (1,752) (2,572) (914) (4,339) (5,253) — — —
Total subprime, option ARM,
Alt-A and other . ........ (2,705) (8,119) (10,824) (1,082) (15,394) (16,476) (11) — (11)
Freddie Mac .............. — — — — — — (17) (320) (337)
Fannie Mae ............... — — — — — — (1) (12) (13)
Commercial mortgage-backed
securities ............... (28) (109) (137) — — — — — —
Obligations of states and political
subdivisions ............. — — — (58) (10) (68) — — —
Manufactured housing ........ (48) (3) (51) (74) (16) (90) (4) — (4)
Total other-than-temporary
impairments on mortgage-
related securities . . ........ (2,781) (8,231) (11,012) (1,214) (15,420) (16,634) (33) (332) (365)
Non-mortgage-related securities:
Asset-backed securities ....... (185) — (185) (942) (106) (1,048) — — —
Total other-than-temporary
impairments on non-
mortgage-related securities . . . (185) — (185) (942) (106) (1,048) — — —
Total other-than-temporary
impairments on available-for-sale
securities . . ............... $(2,966) $(8,231) $(11,197) $(2,156) $(15,526) $(17,682) $(33) $(332) $(365)
(1) As a result of the adoption of an amendment to the accounting standards for investments in debt and equity securities on April 1, 2009, net impairment
of available-for-sale securities recognized in earnings for the nine months ended December 31, 2009 (which is included in the year ended December 31,
2009) includes credit-related other-than-temporary impairments and other-than-temporary impairments on securities which we intend to sell or it is more
likely than not that we will be required to sell. In contrast, net impairment of available-for-sale securities recognized in earnings for the three months
ended March 31, 2009 (which is included in the year ended December 31, 2009) and the years ended December 31, 2008 and 2007 includes both
credit-related and non-credit-related other-than-temporary impairments as well as other-than-temporary impairments on securities for which we could
not assert the positive intent and ability to hold until recovery of the unrealized losses.
During 2009, we recorded net impairment of available-for-sale securities recognized in earnings of $11.2 billion. Of this
amount, $6.9 billion related to impairments recognized in the first quarter of 2009, prior to the adoption of the amendment
to the accounting standards for investments in debt and equity securities, on non-agency mortgage-related securities backed
by subprime, option ARM, Alt-A and other loans that were likely of incurring a contractual principal or interest loss.
Subsequent to our adoption of this amendment, impairments realized on non-agency mortgage-related securities backed by
subprime, option ARM, Alt-A and other loans during 2009 were primarily due to the higher projections of future defaults
and severities related to the collateral underlying these securities, particularly for our more recent vintages of subprime non-
agency mortgage-related securities. We estimate that the future expected principal and interest shortfall on these securities
will be significantly less than the likely impairment required to be recorded under GAAP, as we expect these shortfalls to be
less than the recent fair value declines. Since January 1, 2007, we have incurred actual principal cash shortfalls of
$107 million on impaired securities. However, many of our investments were structured so that realized losses are recognized
when the investment matures. Net impairment of available-for-sale securities recognized in earnings during 2009 included
$137 million related to CMBS where the present value of cash flows expected to be collected was less than the amortized
cost basis of these securities.
Contributing to the impairments recognized during 2009 were certain credit enhancements related to primary monoline
insurers where we have determined that it is likely a principal and interest shortfall will occur, and that in such a case there
is substantial uncertainty surrounding the insurer’s ability to pay all future claims. We rely on monoline bond insurance,
including secondary coverage, to provide credit protection on some of our securities held in our mortgage-related
investments portfolio as well as our non-mortgage- related investments portfolio. See “NOTE 19: CONCENTRATION OF
CREDIT AND OTHER RISKS — Bond Insurers” for additional information. The recent deterioration has not impacted 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
250 Freddie Mac