Freddie Mac 2010 Annual Report Download - page 220

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 we believe it is not more likely than not that we will be required to sell 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 in AOCI. The credit component represents the amount by which the present
value of cash flows expected to be collected from the security is less than the amortized cost basis of the security.
Our net impairment of available-for-sale securities recognized in earnings on our consolidated statements of operations
for the years ended December 31, 2010 and 2009, includes amounts related to certain securities where we have previously
recognized other-than-temporary impairments through AOCI, but upon the recognition of additional credit losses, these
amounts were reclassified out of non-credit losses in AOCI and charged to earnings. In certain instances, we recognized
credit losses in excess of unrealized losses in AOCI.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary contemplates
numerous factors. We perform an evaluation on a security-by-security basis considering all available information. The
relative importance of this information varies based on the facts and circumstances surrounding each security, as well as the
economic environment at the time of assessment. Important factors include, but are not limited to:
• whether we intend to sell the security and it is not more likely than not that we will be required to sell the security
before sufficient time elapses to recover all unrealized losses;
• loan level default modeling for single-family residential mortgages that considers individual loan characteristics,
including current LTV ratio, FICO score, and delinquency status, requires assumptions about future home prices and
interest rates, and employs internal default and prepayment models. The modeling for CMBS employs third-party
models that require assumptions about the economic conditions in the areas surrounding each individual property;
• analysis of the performance of the underlying collateral relative to its credit enhancements using techniques that
require assumptions about future loss severity, default, prepayment, and other borrower behavior. Implicit in this
analysis is information relevant to expected cash flows (such as collateral performance and characteristics);
• the length of time and extent to which the fair value of the security has been less than the book value and the
expected recovery period; and
• the impact of changes in credit ratings (i.e., rating agency downgrades).
For the majority of our available-for-sale securities in an unrealized loss position, we have asserted that we have no
intent to sell and that we believe it is not more likely than not that we will be required to sell the security before recovery of
its amortized cost basis. Where such an assertion has not been made, the security’s entire decline in fair value is deemed to
be other-than-temporary and is recorded within our consolidated statements of operations as net impairment of available-for-
sale securities recognized in earnings.
See “Table 8.2 — Available-For-Sale Securities in a Gross Unrealized Loss Position” for the length of time our
available-for-sale securities have been in an unrealized loss position. Also see “Table 8.3 — Significant Modeled Attributes
for Certain Non-Agency Mortgage-Related Securities” for the modeled default rates and severities that were used to
determine whether our senior interests in certain non-agency mortgage-related securities would experience a cash shortfall.
Freddie Mac and Fannie Mae Securities
We record the purchase of mortgage-related securities issued by Fannie Mae as investments in securities in accordance
with the accounting standards on investments in debt and equity securities. In contrast, commencing January 1, 2010, our
purchase of mortgage-related securities that we issue (e.g., PCs, REMICs and Other Structured Securities, and Other
Guarantee Transactions) is recorded as either investments in securities or extinguishment of debt securities of consolidated
trusts depending on the nature of the mortgage-related security that we purchase. See “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Securitization Activities through Issuances of Freddie Mac Mortgage-Related
Securities” for additional information. We hold these Freddie Mac and Fannie Mae securities that are in an unrealized loss
position at least to recovery and typically to maturity. As the principal and interest on these securities are guaranteed and we
do not intend to sell these securities and it is not more likely than not that we will be required to sell such securities before a
recovery of the unrealized losses, we consider these unrealized losses to be temporary.
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans
We believe the unrealized losses on the non-agency mortgage-related securities we hold are a result of poor underlying
collateral performance, limited liquidity, and large risk premiums. We consider securities to be other-than-temporarily
impaired when future credit losses are deemed likely.
Our review of the securities backed by subprime, option ARM, and Alt-A and other loans includes loan level default
modeling and analyses of the individual securities based on underlying collateral performance, including the collectibility of
amounts that would be recovered from primary monoline insurers. In the case of monoline insurers, we also consider factors
217 Freddie Mac