Freddie Mac 2014 Annual Report Download - page 140

135 Freddie Mac
output of this model, together with other information such as our expectations with respect to the following: (a) future levels of
loan modifications; (b) future loan repurchases by seller/servicers; (c) the adequacy of third-party credit enhancements; (d) the
effects of changes in government policies and programs; (e) the effects of macroeconomic variables such as rates of
unemployment; and (f) the effects of home price changes on borrower behavior. The inability to realize the benefits of our loss
mitigation activities, a lower realized rate of seller/servicer repurchases, declines in home prices, deterioration in the financial
condition of our mortgage insurance counterparties, or increases in delinquency rates would cause our losses to be significantly
higher than those currently estimated.
Individually impaired single-family loans include loans that have undergone a TDR and are measured for impairment as
the excess of our recorded investment in the loan over the present value of the expected future cash flows. Our expectation of
future cash flows incorporates many of the judgments indicated above.
Fair Value Measurements
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of
certain assets and liabilities on a recurring or non-recurring basis. Assets and liabilities within our consolidated financial
statements measured at fair value include: (a) mortgage-related and non-mortgage related securities; (b) mortgage loans held-
for-sale; (c) derivative instruments; (d) certain debt securities of consolidated trusts held by third parties and certain other debt;
and (e) REO. The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework
for measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This accounting guidance
also establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
based on the assumptions a market participant would use at the measurement date. Fair value measurements under this
hierarchy are distinguished among quoted market prices, observable inputs, and unobservable inputs. The measurement of fair
value requires management to make judgments and assumptions. The process for determining fair value using unobservable
inputs is generally more subjective and involves a higher degree of management judgment and assumptions than the
measurement of fair value using observable inputs. These judgments and assumptions may have a significant effect on our
measurements of fair value, and the use of different judgments and assumptions, as well as changes in market conditions, could
have a material effect on our consolidated statements of comprehensive income and consolidated balance sheets. See “FAIR
VALUE HIERARCHY AND VALUATIONS” and “NOTE 16: FAIR VALUE DISCLOSURES” for additional information
regarding fair value hierarchy and measurements.
Impairment Recognition on Investments in Securities
We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for other-than-
temporary impairment. An unrealized loss exists when the fair value of an individual security is less than its amortized cost
basis. As discussed further below, certain other-than-temporary impairment losses are recognized in earnings.
If we intend to sell the security or believe it is more likely than not that we will be required to sell the security prior to
recovery of its amortized cost basis, the security’s entire decline in fair value is deemed to be other-than-temporary and is
recorded within our consolidated statements of comprehensive income as net impairment of available-for-sale securities
recognized in earnings. 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 the security’s unrealized loss, we recognize only the credit component of other-than-
temporary impairment in earnings and the amounts attributable to all other factors are recorded 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.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary requires significant
management judgments and assumptions and consideration of 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. See “NOTE 7:
INVESTMENTS IN SECURITIES — Impairment Recognition on Investments in Securities” and “CONSOLIDATED
BALANCE SHEETS ANALYSIS — Investments in Securities” for more information on impairment recognition on securities.
We believe our judgments and assumptions used in our evaluation of other-than-temporary impairment are reasonable.
However, different judgments or assumptions could have resulted in materially different recognition of other-than-temporary
impairment. It is possible that the losses we ultimately realize could be significantly higher or lower than the losses we have
recognized to date in our consolidated statements of comprehensive income.
Deferred Tax Assets, Net
Deferred tax assets reflect timing differences between the recognition of income/expenses for financial reporting purposes
and the recognition of income/expenses for tax reporting purposes. Deferred tax assets are created when: (a) expenses are
recognized for financial reporting purposes prior to the corresponding recognition of expenses for tax reporting purposes; and/
or (b) income is recognized for tax reporting purposes prior to the corresponding recognition of income for financial reporting
purposes. Deferred tax assets are measured using enacted tax rates and are adjusted as required for the effect of changes in tax
laws or rates. When a change in tax laws or rates occurs, the effect of the change is included in income in the period that
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