Freddie Mac 2014 Annual Report Download - page 187

182 Freddie Mac
collateral on a security-by-security basis to determine whether we expect to receive all of the contractual payments due to us.
While it is possible that, under certain conditions, collateral losses on our CMBS for which we have not recorded an
impairment charge could exceed our credit enhancement levels and a principal or interest loss could occur, we do not believe
that those conditions were likely as of December 31, 2014.
Obligations of States and Political Subdivisions
These investments consist of housing revenue bonds. We believe the unrealized losses on obligations of states and
political subdivisions are primarily a result of movements in interest rates and liquidity and risk premiums. We believe that any
credit risk related to these securities is minimal because of the issuer guarantees provided on these securities.
Bond Insurance
We rely on bond insurance to provide credit protection on some of our non-agency mortgage-related securities.
Circumstances in which: (a) it is expected that a principal and interest shortfall will occur; and (b) there is substantial
uncertainty surrounding a bond insurer’s ability to pay all future claims can give rise to recognition of other-than-temporary
impairment recognized in earnings. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond
Insurers” for additional information.
Other-Than-Temporary Impairments on Available-for-Sale Securities
The table below summarizes our net impairment of available-for-sale securities recognized in earnings by security type.
Table 7.4 — Net Impairment of Available-For-Sale Securities Recognized in Earnings
Net Impairment of Available-For-Sale Securities
Recognized in Earnings For the Year Ended December 31,
2014 2013 2012
(in millions)
Available-for-sale securities:(1)
CMBS $ — $ (14) $ (138)
Subprime (794) (1,258) (1,274)
Option ARM (101) (58) (556)
Alt-A and other (42) (179) (196)
Manufactured housing (1) (1) (4)
Total net impairment of available-for-sale securities recognized in earnings $ (938) $ (1,510) $ (2,168)
(1) Includes $817 million, $568 million, and $0 million of other-than-temporary impairments recognized in earnings for the years ended December 31,
2014, 2013, and 2012, respectively, as we had the intent to sell the related securities before recovery of their amortized cost basis.
The table below presents the changes in the unrealized credit-related other-than-temporary impairment component of the
amortized cost related to available-for-sale securities: (a) that we have written down for other-than-temporary impairment; and
(b) for which the credit component of the loss has been recognized in earnings. The credit-related other-than-temporary
impairment component of the amortized cost represents the difference between: (a) the present value of expected future cash
flows at the time of impairment, including the estimated proceeds from bond insurance; and (b) the amortized cost basis of the
security prior to considering credit losses. The beginning balances represent the other-than-temporary impairment credit loss
components related to available-for-sale securities for which other-than-temporary impairment occurred prior to January 1,
2014 and January 1, 2013, respectively, but will not be realized until the securities are sold, written off, or mature. Net
impairment of available-for-sale securities recognized in earnings is presented as additions in two components based upon
whether the current period is: (a) the first time the debt security was credit-impaired; or (b) not the first time the debt security
was credit-impaired. The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell
previously credit-impaired available-for-sale securities. Additionally, the credit loss component is reduced by the amortization
resulting from significant increases in cash flows expected to be collected that are recognized over the remaining life of the
security.
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