Freddie Mac 2009 Annual Report Download - page 311

value adjustments for mortgages classified as held for sale. For fair value balance sheet purposes, we use a similar approach
when determining the fair value of mortgage loans, including those held-for-investment. The fair value of multifamily
mortgage loans is generally based on market prices obtained from a reliable third-party pricing service provider for similar
mortgages, considering the current credit risk profile for each loan, adjusted for differences in contractual terms.
Cash and Cash Equivalents
Cash and cash equivalents largely consists of highly liquid investment securities with an original maturity of three
months or less used for cash management purposes, as well as cash held at financial institutions and cash collateral posted
by our derivative counterparties. Given that these assets are short-term in nature with limited market value volatility, the
carrying amount on our GAAP consolidated balance sheets is deemed to be a reasonable approximation of fair value.
Federal Funds Sold and Securities Purchased Under Agreements to Resell
Federal funds sold and securities purchased under agreements to resell principally consists of short-term contractual
agreements such as reverse repurchase agreements involving Treasury and agency securities, federal funds sold and
Eurodollar time deposits. Given that these assets are short-term in nature, the carrying amount on our GAAP consolidated
balance sheets is deemed to be a reasonable approximation of fair value.
Other Assets
Other assets consists of investments in qualified LIHTC partnerships that generate federal income tax credits and
deductible operating losses, credit enhancement contracts related to PCs and Structured Securities (pool insurance and
recourse and/or indemnification agreements), financial guarantee contracts for additional credit enhancements on certain
manufactured housing asset-backed securities, REO, property and equipment and other miscellaneous assets.
For the credit enhancement contracts related to PCs and Structured Securities (pool insurance and recourse and/or
indemnification agreements), fair value is estimated using an expected cash flow approach, and is intended to reflect the
estimated amount that a third party would be willing to pay for the contracts. On our consolidated fair value balance sheets,
these contracts are reported at fair value at each balance sheet date based on current market conditions. On our GAAP
consolidated balance sheets, these contracts are initially recorded at fair value at inception, then amortized to expense.
For the credit enhancements on manufactured housing asset-backed securities, the fair value is based on the difference
between the market price of non-credit-impaired manufactured housing securities and credit-impaired manufactured housing
securities that are likely to produce future credit losses, as adjusted for our estimate of a risk premium attributable to the
financial guarantee contracts. The value of the contracts, over time, will be determined by the actual credit-related losses
incurred and, therefore, may have a value that is higher or lower than our market-based estimate. On our GAAP consolidated
financial statements, these contracts are recognized as cash is received.
The other categories of assets that comprise other assets are not financial instruments required to be valued at fair value
under the accounting standards for financial instruments, such as property and equipment. For the majority of these non-
financial instruments in other assets, we use the carrying amounts from our GAAP consolidated balance sheets as the
reported values on our consolidated fair value balance sheets, without any adjustment. These assets represent an insignificant
portion of our GAAP consolidated balance sheets. Certain non-financial assets in other assets on our GAAP consolidated
balance sheets are assigned a zero value on our consolidated fair value balance sheets. This treatment is applied to deferred
items such as deferred debt issuance costs.
We adjust the GAAP-basis deferred taxes reflected on our consolidated fair value balance sheets to include estimated
income taxes on the difference between our consolidated fair value balance sheets net assets attributable to common
stockholders, including deferred taxes from our GAAP consolidated balance sheets, and our GAAP consolidated balance
sheets equity attributable to common stockholders. To the extent the adjusted deferred taxes are a net asset, this amount is
included in other assets. In addition, if our net deferred tax assets on our consolidated fair value balance sheets, calculated as
described above, exceed our net deferred tax assets on our GAAP consolidated balance sheets that have been reduced by a
valuation allowance, our net deferred tax assets on our consolidated fair value balance sheets are limited to the amount of
our net deferred tax assets on our GAAP consolidated balance sheets. If the adjusted deferred taxes are a net liability, this
amount is included in other liabilities.
Total Debt, Net
Total debt, net represents short-term and long-term debt used to finance our assets. On our consolidated GAAP balance
sheets, total debt, net, excluding debt securities denominated in foreign currencies, is reported at amortized cost, which is net
of deferred items, including premiums, discounts and hedging-related basis adjustments. This item includes both non-callable
and callable debt, as well as short-term zero-coupon discount notes. The fair value of the short-term zero-coupon discount
notes is based on a discounted cash flow model with market inputs. The valuation of other debt securities represents the
proceeds that we would receive from the issuance of debt and is generally based on market prices obtained from broker/
308 Freddie Mac