Freddie Mac 2009 Annual Report Download - page 309

relevant recent historical factors, which are considered to be unobservable inputs. As a result REO is classified as Level 3
under the fair value hierarchy.
Low-Income Housing Tax Credit Partnership Equity Investments
Our investments in LIHTC partnerships are reported as consolidated entities or equity method investments in the GAAP
financial statements. We present the fair value of these investments in other assets on our consolidated fair value balance
sheets. For the LIHTC partnerships, the fair value of expected tax benefits is estimated using expected cash flows discounted
at current market yields for newly issued funds obtained by fund sponsors. Expected cash flows represent the tax benefit of a
third party holder from the expected tax credits and expected deductible losses generated from the investment. Our
investments in LIHTC partnerships are valued using unobservable inputs and as a result are classified as Level 3 under the
fair value hierarchy. Our ability to use the federal income tax credits and deductible operating losses generated by these
partnerships is limited. As of December 31, 2009, we wrote down the carrying value of our LIHTC investments to zero, as
we will not be able to realize any value either through reductions to our taxable income and related tax liabilities or through
a sale to a third party as a result of the restriction imposed by Treasury. For more information, see “NOTE 5: VARIABLE
INTEREST ENTITIES” and “NOTE 15: INCOME TAXES”.
Debt Securities Denominated in Foreign Currencies
Foreign-currency denominated debt instruments are measured at fair value pursuant to our fair value option election. We
determine the fair value of these instruments by obtaining multiple quotes from dealers. Since the prices provided by the
dealers consider only observable data such as interest rates and exchange rates, these fair values are classified as Level 2
under the fair value hierarchy.
Derivative Liabilities, Net
See discussion under “Derivative Assets, Net” above.
Consolidated Fair Value Balance Sheets
The supplemental consolidated fair value balance sheets in Table 18.4 present our estimates of the fair value of our
recorded financial assets and liabilities and off-balance sheet financial instruments at December 31, 2009 and 2008. The
valuations of financial instruments on our consolidated fair value balance sheets are in accordance with GAAP fair value
guidelines prescribed by the accounting standards for fair value measurements and disclosures and the accounting standards
for financial instruments.
In 2009, we enhanced our fair value techniques related to the valuation of several assets and liabilities reported or
disclosed in our consolidated fair value balance sheets at fair value, as follows:
• We changed our technique to value the guarantee obligation to reflect changing market conditions, our revised
outlook of future economic conditions and the changes in composition of our guarantee loan portfolio. To derive the
fair value of our guarantee obligation, we use entry-pricing information for all guaranteed loans that would qualify for
purchase under current underwriting guidelines (used for the majority of the guaranteed loans, but translates into a
small portion of the overall fair value of the guarantee obligation). We use our internal credit models, which
incorporate factors such as loan characteristics, expected losses and risk premiums without further adjustment for
those guaranteed loans that would not qualify for purchase under current underwriting guidelines (used for less than a
majority of the guaranteed loans, but translates into the vast majority of the overall fair value of the guarantee
obligation). We also adjusted certain inputs to our internal models based on actual impacts of the MHA Program and
recent data and enhanced our prepayment model to use state-level house price growth data and forecasts instead of
national house price growth data.
• We changed our valuation technique for single-family mortgage loans that were never securitized to reflect
delinquency status based on non-performing loan values from dealers and transition rates to default.
• We enhanced our valuation technique for multifamily mortgage loans to consider the current credit risk profile for
each loan, to better reflect current market conditions.
• We enhanced our valuation technique for single-family REO properties to incorporate relevant recent historical factors
using a model-based approach, to more quickly respond to changing market conditions related to REO, net.
306 Freddie Mac