Freddie Mac 2014 Annual Report Download - page 136

131 Freddie Mac
At December 31, 2014, our aggregate funding received from Treasury under the Purchase Agreement was $71.3 billion.
This aggregate funding amount does not include the initial $1.0 billion liquidation preference of senior preferred stock that we
issued to Treasury in September 2008 as an initial commitment fee and for which no cash was received.
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and
we will not be able to do so for the foreseeable future, if at all. In addition, under the Purchase Agreement, the payment of
dividends does not reduce the outstanding liquidation preference. Accordingly, while we have paid aggregate cash dividends to
Treasury of $91.0 billion, the liquidation preference on the senior preferred stock remains $72.3 billion.
For more information on these matters, see “BUSINESS — Conservatorship and Related Matters” and “— Regulation
and Supervision.”
FAIR VALUE HIERARCHY AND VALUATIONS
The three levels of the fair value hierarchy under the accounting guidance for fair value measurements and disclosures are
described below:
• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets
or liabilities;
• Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets
and liabilities in markets that are not active; inputs other than quoted market prices that are observable for the asset or
liability; and inputs that are derived principally from or corroborated by observable market data for substantially the
full term of the assets or liabilities; and
• Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity and that are
significant to the fair values.
We categorize assets and liabilities recorded or disclosed at fair value within the fair value hierarchy based on the
valuation processes used to derive their fair values and our judgment regarding the observability of the related inputs. Those
judgments are based on our knowledge and observations of the markets relevant to the individual assets and liabilities and may
vary based on market conditions. We review ranges of third-party prices and transaction volumes, and hold discussions with
dealers and pricing service vendors to understand and assess the extent of market benchmarks available and the judgments or
modeling required in their processes. Based on these factors, we determine whether the inputs are observable and whether the
principal markets are active or inactive. For additional information regarding our classification of assets and liabilities within
the fair value hierarchy, the valuation techniques and processes used to measure fair value, and controls over fair value
measurement, see “NOTE 16: FAIR VALUE DISCLOSURES.”
Level 3 Recurring Fair Value Measurements
The process for determining fair value using unobservable inputs (Level 3) is generally more subjective and involves a
higher degree of management judgment and assumptions than the measurement of fair value using observable inputs. At
December 31, 2014 and 2013, we measured and recorded 28% and 31%, respectively, of total assets carried at fair value on our
consolidated balance sheets on a recurring basis using unobservable inputs. At December 31, 2014 and 2013, we measured and
recorded less than 1% and 11%, respectively, of total liabilities carried at fair value on our consolidated balance sheets on a
recurring basis using unobservable inputs. These percentages were calculated before the impact of counterparty and cash
collateral netting. See “NOTE 16: FAIR VALUE DISCLOSURES — Changes in Fair Value Levels” for a discussion of changes
in our Level 3 assets and liabilities and “— Table 16.2 — Assets and Liabilities on Our Consolidated Balance Sheets Measured
at Fair Value on a Recurring Basis Using Significant Unobservable Inputs” for the Level 3 reconciliation.
Consideration of Credit Risk in Our Valuation
We consider credit risk in the valuation of our assets and liabilities through consideration of credit risk of the counterparty
in asset valuations and through consideration of our own institutional credit risk in liability valuations on our GAAP
consolidated balance sheets.
We consider credit risk in our valuation of investments in mortgage-related securities based on fair value measurements
that are largely the result of price quotes received from multiple dealers or pricing services. Some of the key valuation drivers
of such fair value measurements include the collateral type, collateral performance, credit quality of the issuer, tranche type,
weighted average life, vintage, coupon, and interest rates. We also make adjustments for items such as subordination or other
types of credit enhancements and liquidity, where applicable. In cases where internally developed models are used, we use
market-based inputs or calibrate such inputs to market data. For a discussion of types and characteristics of mortgage loans
underlying our mortgage-related securities, see “Table 27 — Characteristics of Mortgage-Related Securities on Our
Consolidated Balance Sheets” and “RISK MANAGEMENT — Credit Risk Overview — Mortgage Credit Risk Overview —
Single-Family Mortgage Credit Risk Framework and Profile.”
We also consider credit risk when we evaluate the valuation of our derivative positions, including the impact of
institutional credit risk in the event that the counterparty does not honor its payment obligation. However, our fair value of
derivatives is not adjusted for credit risk because we obtain collateral from, or post collateral to, counterparties, typically within
Table of Contents