Freddie Mac 2014 Annual Report Download - page 228

223 Freddie Mac
technique are the TBA prices and the security characteristics mentioned above. These securities have observable market pricing
and are classified as Level 2.
Adjustable-rate single-class securities and the majority of multiclass securities are valued using the median of external
sources. For certain multiclass securities we are able to receive prices from only a single external source. Adjustable-rate
single-class securities and the multiclass securities valued using these techniques generally have observable market prices and
are classified as Level 2. However, certain multiclass securities valued using these techniques are classified as Level 3 when
there is a low volume or level of activity in the market for those securities.
Certain multiclass securities for which we are not able to obtain external prices due to limited relevant market activity are
valued using a discounted cash flow technique. Under this technique, securities are valued by starting with a third-party market
price for a similar security within our portfolio. We then use our proprietary prepayment and interest rate models to calculate an
OAS for the similar security, which is used to determine the net present value of the projected cash flows for the security to be
valued. The significant unobservable input used in the fair value measurement of these securities is the OAS. Significant
increases (decreases) in the OAS in isolation would result in a significantly lower (higher) fair value measurement. These
securities are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Certain complex multiclass securities for which current cash flow information is not readily available are valued using a
risk-metric pricing technique. Under this technique, securities are valued by starting with a prior period price and adjusting that
price for market changes in certain key risk metrics such as key rate durations. If necessary, our judgment is applied to adjust
the price based on specific security characteristics. The significant unobservable inputs used in the fair value measurement of
these securities are the key risk metrics. Significant increases (decreases) in key rate durations in isolation would result in a
significantly lower (higher) fair value measurement. These securities are classified as Level 3 as significant inputs used in the
fair value measurement are unobservable.
Commercial Mortgage-Backed Securities
The majority of our CMBS are valued using the median of external sources. For a small number of CMBS, we are able to
receive prices from only a single external source. CMBS valued using these techniques generally have observable market
pricing and are classified as Level 2. However, certain CMBS valued using these techniques are classified as Level 3 when
there is a low volume or level of activity in the market for those securities.
Subprime, Option ARM, and Alt-A and Other (Mortgage-Related); Obligations of States and Political Subdivisions; and
Manufactured Housing
Subprime, option ARM, and Alt-A and other securities consist of non-agency mortgage-related securities backed by
subprime, option ARM, and/or Alt-A and other collateral. Obligations of states and political subdivisions consist primarily of
housing revenue bonds. Manufactured housing securities consist of non-agency mortgage-related securities backed by loans on
manufactured housing properties. These types of securities are all valued based on the median of external sources and are
classified as Level 3 due to the low volume and level of activity in the markets for these securities.
U.S. Treasury Securities
U.S. Treasury securities are valued using quoted prices in active markets for identical assets and are classified as Level 1.
Mortgage Loans, Held-for-Sale
Mortgage loans, held-for-sale consist of multifamily mortgage loans with the fair value option elected that are measured
at fair value on a recurring basis.
Our multifamily mortgage loans, held-for-sale are primarily valued using market prices from a third-party pricing service
that uses a discounted cash flow technique calibrated to the exit price for these loans as reflected in the K Certificate
securitization market. Under this technique, the pricing service forecasts cash flows for the various mortgage loans and
discounts them at a market rate, including a spread that is based on our recent securitization activity, which we have defined as
our principal exit market. These loans are classified as Level 2 given the observable nature of our securitization pricing.
Mortgage Loans, Held-for-Investment
Mortgage loans, held-for-investment consist of single-family and multifamily mortgage loans where the measurement of
impairment is based on the fair value of the underlying collateral. These loans are measured at fair value on a non-recurring
basis and are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Single-family
The collateral is valued using our internal model that uses REO disposition, short sale and third-party sale values,
combined with loan level characteristics using the repeat housing sales index to estimate the current fair value of the loan. The
inputs used in the fair value measurement are the historical average sales proceeds and the repeat housing sales index.
Significant increases (decreases) in the historical average sales proceeds per loan in isolation would result in significantly
higher (lower) fair value measurements.
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