Freddie Mac 2010 Annual Report Download - page 189

Investments in Securities
Investments in securities consist primarily of mortgage-related securities. We classify securities as “available-for-sale” or
“trading.” We currently have not classified any securities as “held-to-maturity,” although we may elect to do so in the future.
In addition, we elected the fair value option for certain available-for-sale mortgage-related securities, including investments
in securities that: (a) can contractually be prepaid or otherwise settled in such a way that we may not recover substantially
all of our initial recorded investment; or (b) are not of high credit quality at the acquisition date and are identified as within
the scope of the accounting standards for investments in beneficial interests in securitized financial assets. Subsequent to our
election, these securities were classified as trading securities. Securities classified as available-for-sale and trading are
reported at fair value with changes in fair value included in AOCI and other gains (losses) on investment securities,
respectively. See “NOTE 20: FAIR VALUE DISCLOSURES” for more information on how we determine the fair value of
securities.
We record purchases and sales of securities that are specifically exempt from the requirements of derivatives and hedge
accounting on a trade date basis. Securities underlying forward purchases and sales contracts that are not exempt from the
requirements of derivatives and hedge accounting are recorded on the expected settlement date with a corresponding
commitment recorded on the trade date.
When we purchase REMICs and Other Structured Securities and certain Other Guarantee Transactions that we have
issued, we account for these securities as investments in debt securities as we are investing in the debt securities of a non-
consolidated entity. We consolidate the trusts that issue these securities when we hold substantially all of the outstanding
beneficial interests issued by the trusts. We recognize interest income on the securities and interest expense on the debt we
issued. See “Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities — Purchases and Sales
of Freddie Mac Mortgage-Related Securities” for additional information on accounting for purchases of PCs and beneficial
interests issued by resecuritization trusts.
In connection with transfers of financial assets that qualified as sales prior to the adoption of the amendments to
accounting standards on transfers of financial assets and the consolidation of VIEs, we may have retained individual
securities not transferred to third parties upon the completion of a securitization transaction. These securities may have been
backed by mortgage-related assets purchased from our customers, PCs, and REMICs and Other Structured Securities. The
securities we acquired in these transactions were classified as available-for-sale or trading and are considered guaranteed
investments. Therefore, the fair values of these securities reflect that they are considered to be of high credit quality and the
securities are not subject to credit-related impairments. They are subject to the credit risk associated with the underlying
collateral. Therefore, our exposure to credit losses on collateral underlying our retained securitization interests was recorded
within our reserve for guarantee losses.
For most of our investments in securities, interest income is recognized using the effective interest method. Deferred
items, including premiums, discounts, and other basis adjustments, are amortized into interest income over the contractual
lives of the securities.
For certain investments in securities, interest income is recognized using the prospective effective interest method. We
specifically apply this accounting to beneficial interests in securitized financial assets that: (a) can contractually be prepaid or
otherwise settled in such a way that we may not recover substantially all of our recorded investment; (b) are not of high
credit quality at the acquisition date; or (c) have been determined to be other-than-temporarily impaired. We recognize as
interest income (over the life of these securities) the excess of all estimated cash flows attributable to these interests over
their book value using the effective interest method. We update our estimates of expected cash flows periodically and
recognize changes in the calculated effective interest rate on a prospective basis.
We recognize impairment losses on available-for-sale securities within our consolidated statements of operations as net
impairment of available-for-sale securities recognized in earnings when we conclude that a decrease in the fair value of a
security is other-than-temporary. On April 1, 2009, we prospectively adopted an amendment to the accounting standards for
investments in debt and equity securities. This amendment changed the recognition, measurement, and presentation of other-
than-temporary impairment for debt securities.
We conduct quarterly reviews to identify and evaluate each available-for-sale security that has an unrealized loss for
other-than-temporary impairment. An unrealized loss exists when the current fair value of an individual security is less than
its amortized cost basis.
We recognize other-than-temporary impairment in earnings if one of the following conditions exists: (a) we have the
intent to sell the security; (b) it is more likely than not that we will be required to sell the security before recovery of its
unrealized loss; or (c) we do not expect to recover the amortized cost basis of the security. If we do not intend to sell the
security and will not be required to sell the security prior to recovery of its unrealized loss, we recognize only the credit
component of other-than-temporary impairment in earnings and the amounts attributable to all other factors are recognized,
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