Freddie Mac 2010 Annual Report Download - page 157

beyond calculating median prices and discarding certain prices that are determined not to be valid based on our validation
processes. See “Controls over Fair Value Measurement” for information on our validation processes.
Our valuation process and related fair value hierarchy assessments require us to make judgments regarding the liquidity
of the marketplace. These judgments are based on the volume of securities traded in the marketplace, the width of bid/ask
spreads and dispersion of prices on similar securities. As previously mentioned, the non-agency mortgage-related security
markets continued to be illiquid during 2010. We continue to utilize the prices on such securities provided to us by various
pricing services and dealers and believe that the procedures executed by the pricing services and dealers, combined with our
internal verification process, ensure that the prices used to develop our financial statements are in accordance with the
guidance in the accounting standards for fair value measurements and disclosures.
We also consider credit risk in the valuation of our assets and liabilities with the credit risk of the counterparty
considered in asset valuations and our own institutional credit risk considered in liability valuations. See “Consideration of
Credit Risk in Our Valuation” for more information.
We periodically evaluate our valuation techniques and may change them to improve our fair value estimates, to
accommodate market developments or to compensate for changes in data availability and reliability or other operational
constraints. We review a range of market quotes from pricing services or dealers and perform analysis of internal valuations
on a monthly basis to confirm the reasonableness of the valuations. See “QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks” for a discussion of market risks
and our interest-rate sensitivity measures, PMVS and duration gap.
Table 63 below summarizes our assets and liabilities measured at fair value on a recurring basis at December 31, 2010.
Table 63 — Summary of Assets and Liabilities at Fair Value on a Recurring Basis
Total GAAP
Recurring
Fair Value
Percentage in
Level 3
Total GAAP
Recurring
Fair Value
Percentage in
Level 3
2010 2009
At December 31,
(dollars in millions)
Assets:
Investments in securities:
Available-for-sale, at fair value . ..................................... $232,634 30% $384,684 37%
Trading, at fair value . ........................................... 60,262 5 222,250 2
Mortgage loans:
Held-for-sale, at fair value ......................................... 6,413 100 2,799 100
Derivative assets, net
(1)
............................................. 143 — 215 1
Other assets:
Guarantee assets, at fair value . ..................................... 541 100 10,444 100
Total assets carried at fair value on a recurring basis
(1)
.................... $299,993 25 $620,392 25
Liabilities:
Debt securities recorded at fair value ................................... $ 4,443 —% $ 8,918 —%
Derivative liabilities, net
(1)
.......................................... 1,209 3 589 3
Total liabilities carried at fair value on a recurring basis
(1)
................. $ 5,652 2 $ 9,507 2
(1) Percentages by level are based on gross fair value of derivative assets and derivative liabilities before counterparty netting, cash collateral netting, net
trade/settle receivable or payable and net derivative interest receivable or payable.
Changes in Level 3 Recurring Fair Value Measurements
At December 31, 2010 and 2009, we measured and recorded at fair value on a recurring basis $79.8 billion and
$161.5 billion, respectively, or approximately 25% of total assets carried at fair value on a recurring basis at both dates,
using significant unobservable inputs (Level 3), before the impact of counterparty and cash collateral netting. Our Level 3
assets at December 31, 2010 primarily consist of non-agency mortgage-related securities. At December 31, 2010 and 2009,
we also measured and recorded at fair value on a recurring basis Level 3 liabilities of $0.8 billion and $0.6 billion,
respectively, or 2% of total liabilities at both dates, carried at fair value on a recurring basis, before the impact of
counterparty and cash collateral netting. Our Level 3 liabilities consist of certain derivative contracts in which we are in a
liability position.
During 2010, our Level 3 assets decreased by $81.7 billion primarily due to the transfer of the majority of CMBS from
Level 3 to Level 2 and our adoption of the amendments to the accounting standards for transfers of financial assets and
consolidation of VIEs. During 2010, the CMBS market continued to improve and we observed significantly less variability in
fair value quotes received from dealers and third-party pricing services. In the fourth quarter of 2010 we determined that
these market conditions stabilized to a degree that we believe indicates unobservable inputs are no longer significant to the
fair values of these securities. As a result, we transferred $51.3 billion of CMBS from Level 3 to Level 2. The adoption of
the amendments to the accounting standards for transfers of financial assets and consolidation of VIEs resulted in the
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