Freddie Mac 2014 Annual Report Download - page 236

231 Freddie Mac
securities retained in our investment portfolio or issued as debt to third parties. See “Valuation Techniques for Assets and
Liabilities Measured on Our Consolidated Balance Sheets at Fair Value — Investments in Securities.”
The management and guarantee fee is valued by estimating the present value of the cash flows related to our management
and guarantee fee. The management and guarantee fees for the majority of our loans are valued using third-party dealer prices
on hypothetical interest-only securities based on collateral characteristics from our single-family credit guarantee portfolio. For
loans where third-party market data is not readily available, we use a discounted cash flow approach, leveraging the dealer
prices received for the majority of our loans and including only those cash flows related to our management and guarantee fee.
The credit obligation related to performing our guarantee is valued by estimating the fair value of the related credit and
other costs (such as general and administrative expenses) and benefits (such as credit enhancements) inherent in our guarantee
obligation. For loans that qualify for purchase under current underwriting standards, we use the delivery and guarantee fees that
we charge under our current market pricing as a market observation. For loans that do not qualify for purchase based on current
underwriting standards, we use our internal credit models, which incorporate factors such as loan characteristics, loan
performance status information, expected losses, and risk premiums.
Single-family mortgage loans that qualify for purchase under current underwriting standards are classified as Level 2 as
the significant inputs used for the valuation of these loans, such as security pricing, our externally published credit pricing
matrices, and third-party prices used in valuing the management and guarantee fee, are observable, while the unobservable
inputs, such as general and administrative expenses and credit enhancements, are not significant to the fair value measurement.
Single-family mortgage loans that do not qualify for purchase under current underwriting standards are classified as Level 3 as
the credit cost is based on our internal credit models which use unobservable inputs that are significant to the fair value
measurement.
HARP Loans
For loans that have been refinanced under HARP, we value our guarantee obligation using the delivery and guarantee fees
currently charged by us under that initiative. HARP loans valued using this technique are classified as Level 2, as the fees
charged by us are observable. If, subsequent to delivery, the refinanced loan no longer qualifies for purchase based on current
underwriting standards (such as becoming past due or being modified), the fair value of the guarantee obligation is then
measured using: (a) our internal credit models; or (b) the median of external sources, if the loan’s principal market has changed
to the whole loan market. HARP loans valued using either of these techniques are classified as Level 3 as significant inputs are
unobservable. The majority of our HARP loans are classified as Level 2.
The total compensation that we receive for the delivery of a HARP loan reflects the pricing that we are willing to offer
because HARP is a part of a broader government program intended to provide assistance to homeowners and prevent
foreclosures. When HARP ends (currently scheduled for December 31, 2015), the beneficial pricing afforded to HARP loans
will no longer be reflected in our delivery and guarantee fee pricing structure. If these benefits were not reflected in the pricing
for these loans, the fair value of our mortgage loans would have decreased by $19.1 billion and $18.5 billion as of
December 31, 2014 and 2013, respectively. The total fair value of the loans in our portfolio that reflects the pricing afforded to
HARP loans as of December 31, 2014 and 2013 is $119.8 billion and $145.0 billion, respectively.
Multifamily Loans
For a discussion of the techniques used to determine the fair value of held-for-sale and impaired held-for-investment
multifamily mortgage loans, see “Valuation Techniques for Assets and Liabilities Measured on Our Consolidated Balance
Sheets at Fair Value — Mortgage Loans, Held-for-Sale” and “— Mortgage Loans, Held-for-Investment,” respectively. Non-
impaired multifamily mortgage loans are primarily valued using market prices from a third-party pricing service that uses a
discounted cash-flow technique. 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 pricing data obtained from purchases and sales of
similar mortgage loans, adjusted based on the mortgage's current LTV ratio and DSCR. The significant unobservable inputs
used in the fair value measurement of these loans are the current LTV ratio and DSCR. These loans are classified as Level 3 as
significant inputs used in the fair value measurement are unobservable.
Total Debt, Net
Total debt, net represents debt securities of consolidated trusts held by third parties and other debt that we issued to
finance our assets. On our consolidated GAAP balance sheets, total debt, net, excluding debt securities for which the fair value
option has been elected, is reported at amortized cost, which is net of deferred items, including premiums, discounts, and
hedging-related basis adjustments.
For debt securities of consolidated trusts, the valuation techniques we use are similar to the techniques we use to value
our investments in agency securities for GAAP purposes. See “Valuation Techniques for Assets and Liabilities Measured on
Our Consolidated Balance Sheets at Fair Value — Investments in Securities — Mortgage-Related Securities — Agency
Securities” for additional information regarding the valuation techniques we use.
Other debt includes short-term zero-coupon discount notes, callable debt, and non-callable debt. Short-term zero-coupon
discount notes are valued using a yield analysis technique. Under this technique, the debt instruments are valued using
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