Freddie Mac 2009 Annual Report Download - page 306

The changes in fair value attributable to changes in instrument-specific credit risk were determined by comparing the
total change in fair value of the debt to the total change in fair value of the interest rate and foreign currency derivatives
used to hedge the debt. Any difference in the fair value change of the debt compared to the fair value change in the
derivatives is attributed to instrument-specific credit risk.
The difference between the aggregate fair value and aggregate unpaid principal balance for foreign-currency
denominated debt due after one year was $141 million and $445 million at December 31, 2009 and 2008, respectively.
Related interest expense continues to be reported as interest expense in our consolidated statements of operations. See
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Debt Securities Issued” for additional information
about the measurement and recognition of interest expense on debt securities issued.
Multifamily Held-For-Sale Mortgage Loans with the Fair Value Option Elected
Beginning in the third quarter of 2008, we elected the fair value option for multifamily mortgage loans purchased
through our Capital Market Execution program to reflect our strategy in this program. Under this program, we acquire loans
we intend to sell. While this is consistent with our overall strategy to expand our multifamily loan holdings, it differs from
the buy-and-hold strategy that we have traditionally used with respect to multifamily loans. These multifamily mortgage
loans are classified as held-for-sale mortgage loans in our consolidated balance sheets to reflect our intent to sell these loans
in the future.
We recorded $(81) million and $(14) million from the change in fair value in gains (losses) on investment activity in
our consolidated statements of operations for the year ended December 31, 2009 and 2008, respectively. The fair value
changes that were attributable to changes in the instrument-specific credit risk were $24 million and $(69) million for the
year ended December 31, 2009 and 2008, respectively. The gains and losses attributable to changes in instrument specific
credit risk were determined primarily from the changes in OAS level.
The difference between the aggregate fair value and the aggregate unpaid principal balance for multifamily held-for-sale
loans with the fair value option elected was $(97) million and $(14) million at December 31, 2009 and 2008, respectively.
Related interest income continues to be reported as interest income in our consolidated statements of operations. See
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Mortgage Loans” for additional information about
the measurement and recognition of interest income on our mortgage loans.
Valuation Methods and Assumptions Subject to Fair Value Hierarchy
We categorize assets and liabilities that we measured and reported at fair value in our consolidated balance sheets
within the fair value hierarchy based on the valuation process used to derive the fair value and our judgment regarding the
observability of the related inputs. Those judgments are based on our knowledge and observations of the markets relevant to
the individual assets and liabilities and may vary based on current market conditions. In formulating our judgments, we
review ranges of third party prices and transaction volumes, and hold discussions with dealers and pricing service vendors to
understand and assess the extent of market benchmarks available and the judgments or modeling required in their processes.
Based on these factors, we determine whether the fair values are observable in active markets or the markets are inactive.
On April 1, 2009, we adopted an amendment to the accounting standards for fair value measurements and disclosures,
which provides additional guidance for estimating fair value when the volume and level of activities have significantly
decreased. The adoption of this standard had no impact on our consolidated financial statements.
Our Level 1 financial instruments consist of exchange-traded derivatives where quoted prices exist for the exact
instrument in an active market and our investment in Treasury bills.
Our Level 2 instruments generally consist of high credit quality agency mortgage-related securities, non-mortgage-
related asset-backed securities, interest-rate swaps, option-based derivatives and foreign-currency denominated debt. These
instruments are generally valued through one of the following methods: (a) dealer or pricing service values derived by
comparison to recent transactions of similar securities and adjusting for differences in prepayment or liquidity characteristics;
or (b) modeled through an industry standard modeling technique that relies upon observable inputs such as discount rates
and prepayment assumptions.
Our Level 3 financial instruments primarily consist of non-agency residential mortgage-related securities, commercial
mortgage-backed securities, certain agency mortgage-related securities, our guarantee asset and multifamily mortgage loans
held-for-sale. While the non-agency mortgage-related securities market has become significantly less liquid, resulting in
lower transaction volumes, wider credit spreads and less transparency since 2008, we value our non-agency mortgage-related
securities based primarily on prices received from third party pricing services and prices received from dealers. The
techniques used to value these instruments generally are either (a) a comparison to transactions of instruments with similar
collateral and risk profiles; or (b) an industry standard modeling technique such as the discounted cash flow model. For a
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