Freddie Mac 2014 Annual Report Download - page 230

225 Freddie Mac
All Other Assets and Liabilities
All other assets and, from time to time, other liabilities consist primarily of mortgage servicing rights. Mortgage servicing
rights are valued using a discounted cash flow technique by a third-party vendor that specializes in valuing and brokering sales
of mortgage servicing rights. Under this technique, the cash flows from the mortgage servicing rights are discounted based on
estimated prepayment rates, estimated costs to service both performing and non-accrual loans, and estimated servicing income
per loan (including ancillary income). The significant unobservable inputs used in the fair value measurement of mortgage
servicing rights are the estimates of prepayment rates, costs to service per loan, and servicing income per loan. Significant
increases (decreases) in cost to service per loan and prepayment rate in isolation would result in a significantly lower (higher)
fair value measurement. Significant increases (decreases) in servicing income per loan in isolation would result in a
significantly higher (lower) fair value measurement. Mortgage servicing rights are classified as Level 3 as significant inputs
used in the fair value measurement are unobservable.
REO, Net
REO, net consists primarily of single-family REO. REO, net is initially measured at its fair value less costs to sell, and is
subsequently measured at the lower of cost or fair value less costs to sell. REO, net is valued using an internal model and is
classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Beginning in the third quarter of 2014, our internal model uses REO disposition prices combined with loan level
characteristics using the repeat housing sales index to estimate the current fair value of the REO. This valuation technique is
used to measure both the initial value of REO and the valuation of REO at the lower of cost or fair value, as necessary. The
significant unobservable inputs used in the fair value measurement of REO, net are the historical sales proceeds per property
and the repeat housing sales index. Significant increases (decreases) in the historical sales proceeds per property in isolation
would result in significantly higher (lower) fair value measurement.
As of December 31, 2013, our internal model used actual REO disposition prices for the prior three months, calibrated to
the most recent month's disposition prices, to determine the average sales proceeds per property at the state level, expressed as
a fixed percentage based on the ratio of the disposition price to the UPB of the associated loan. This fixed percentage was then
applied to the UPB immediately prior to the acquisition to determine the fair value of the individual property. Certain
adjustments, such as state-level adjustments, were made to the estimated fair value, as applicable. The significant unobservable
input used in the fair value measurement of REO, net was the historical average sales proceeds per property by state.
Significant increases (decreases) in the historical average sales proceeds per property by state in isolation would result in a
significantly higher (lower) fair value measurement.
Debt Securities of Consolidated Trusts Held by Third Parties, at Fair Value
We elected the fair value option for interest-only debt securities of consolidated trusts held by third parties. These consist
of a multifamily K Certificate where we are the primary beneficiary and certain REMICs. These are valued using either the
median of external sources or a single external source (which may be the counterparty to the transaction) and are classified as
Level 2 due to market pricing that is observable. See “Fair Value Option — Debt Securities of Consolidated Trusts Held by
Third Parties” for additional information.
Other Debt, at Fair Value
We elected the fair value option on our STACR debt notes. Our STACR debt notes are valued using the median of
external sources and are classified as Level 2 based on observable market prices. See “Fair Value Option — Other Debt” for
additional information.
Quantitative Information about Level 3 Fair Value Measurements for Assets and Liabilities Measured on Our
Consolidated Balance Sheets at Fair Value
The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs for
assets and liabilities measured on our consolidated balance sheets at fair value on a recurring basis using unobservable inputs
(Level 3) as of December 31, 2014 and 2013.
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