Freddie Mac 2010 Annual Report Download - page 99

Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities
Table 27 provides information about the mortgage-related securities for which we recognized other-than-temporary
impairments for the three months ended December 31, 2010 and 2009.
Table 27 — Net Impairment on Available-For-Sale Mortgage-Related Securities Recognized in Earnings
UPB
Net Impairment of
Available-For-Sale
Securities Recognized
in Earnings UPB
Net Impairment of
Available-For-Sale
Securities Recognized
in Earnings
December 31, 2010 December 31, 2009
Three Months Ended
(in millions)
Subprime:
2006 & 2007 first lien ...................................... $31,315 $1,191 $26,398 $499
Other years — first and second liens
(1)
........................... 1,005 16 870 16
Total subprime — first and second liens
(1)
........................ 32,320 1,207 27,268 515
Option ARM:
2006 & 2007 ............................................ 11,142 585 2,516 15
Other years . ............................................ 2,156 83 167 —
Total option ARM . . ...................................... 13,298 668 2,683 15
Alt-A:
2006 & 2007 ............................................ 4,987 204 2,516 35
Other years . ............................................ 6,062 161 871 16
Total Alt-A . ............................................ 11,049 365 3,387 51
Other loans . . . ............................................ 616 7 80 —
Total subprime, option ARM, Alt-A and other loans . . . . . ............ 57,283 2,247 33,418 581
CMBS . ................................................. 1,141 19 1,596 83
Manufactured housing . ...................................... 312 4 142 3
Total available-for-sale mortgage-related securities . . .................. $58,736 $2,270 $35,156 $667
(1) Includes all second liens.
We recorded net impairment of available-for-sale mortgage-related securities recognized in earnings of $2.3 billion and
$4.3 billion during the three months and year ended December 31, 2010, respectively, as our estimate of the present value of
expected future credit losses on certain individual securities increased during the periods. Included in these net impairments
are $2.2 billion and $4.2 billion of impairments related to securities backed by subprime, option ARM, and Alt-A and other
loans during the three months and year ended December 31, 2010, respectively.
The credit performance of loans underlying our holdings of non-agency mortgage-related securities has been declining
for several years. This decline has been particularly severe for subprime, option ARM, and Alt-A and other loans. Many of
the same economic factors impacting the performance of our single-family credit guarantee portfolio also impact the
performance of our investments in non-agency mortgage-related securities. High unemployment, a large inventory of
seriously delinquent mortgage loans and unsold homes, tight credit conditions, and weak consumer confidence contributed to
poor performance during the three months and year ended December 31, 2010. In addition, subprime, option ARM, and
Alt-A and other loans backing the securities we hold have significantly greater concentrations in the states that are
undergoing the greatest economic stress, such as California, Florida, Arizona, and Nevada. Loans in these states undergoing
economic stress are more likely to become seriously delinquent and the credit losses associated with such loans are likely to
be higher.
We rely on monoline bond insurance, including secondary coverage, to provide credit protection on some of our
investments in non-agency mortgage-related securities. We have determined that there is substantial uncertainty surrounding
certain monoline bond insurers’ ability to pay our future claims on expected credit losses related to our non-agency
mortgage-related security investments. This uncertainty contributed to the impairments recognized in earnings during the
years ended December 31, 2010 and 2009. See “NOTE 19: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond
Insurers” for additional information.
While it is reasonably possible that collateral losses on our available-for-sale mortgage-related securities where we have
not recorded an impairment earnings charge could exceed our credit enhancement levels, we do not believe that those
conditions were likely at December 31, 2010. Based on our conclusion that we do not intend to sell our remaining available-
for-sale mortgage-related securities in an unrealized loss position and it is not more likely than not that we will be required
to sell these securities before a sufficient time to recover all unrealized losses and our consideration of other available
information, we have concluded that the reduction in fair value of these securities was temporary at December 31, 2010 and
as such has been recorded in AOCI.
96 Freddie Mac