Freddie Mac 2014 Annual Report Download - page 237

232 Freddie Mac
published yield matrices which are based on the days to maturity of the debt and converted into a price. Significant inputs used
in this technique are the published yield matrices. Short-term zero-coupon discount notes are classified as Level 2 as the
significant inputs used are observable in active markets. Other debt securities, including both callable and non-callable debt, are
valued using a single external source or median of external sources. These debt securities generally have observable market
pricing and are classified as Level 2. However, certain other debt securities are classified as Level 3 when there is a low volume
or level of activity in the market for those types of debt securities.
Total debt, net for which we have elected the fair value option includes certain debt securities of consolidated trusts held
by third parties and certain other debt. We report these items at fair value on our GAAP consolidated balance sheets. See
“Valuation Techniques for Assets and Liabilities Measured on Our Consolidated Balance Sheets at Fair Value — Debt
Securities of Consolidated Trusts Held by Third Parties, at Fair Value” and “— Other Debt, at Fair Value” for additional
information.
Guarantee Obligation
Our guarantee obligation is classified as Level 3 as significant inputs used in the fair value measurement are
unobservable. The technique for estimating the fair value of our guarantee obligation is described in the “Mortgage Loans —
Single-Family Loans” section above.
Fair Value Option
We elected the fair value option for certain types of investments in securities, multifamily held-for-sale mortgage loans,
and certain debt.
Investments in Securities
We elected the fair value option for certain mortgage-related securities to better reflect the natural offset these securities
provide to fair value changes recorded historically on our guarantee asset at the time of our election. In addition, upon adoption
of the accounting guidance for the fair value option, we elected this option for securities within the scope of the accounting
guidance for investments in beneficial interests in securitized financial assets to better reflect any valuation changes that would
occur subsequent to impairment write-downs previously recorded on these instruments. Related interest income continues to be
reported as interest income in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” for additional information about the measurement
and recognition of interest income on investments in securities. For information regarding the net unrealized gains (losses) on
trading securities, which include gains (losses) for other items that are not selected for the fair value option, see Gains (losses)
on trading securities within “Table 13.2 — Segment Earnings and Reconciliation to GAAP Results."
Multifamily Held-For-Sale Mortgage Loans
We elected the fair value option for multifamily mortgage loans that were purchased for securitization. These multifamily
mortgage loans are classified as held-for-sale mortgage loans on our consolidated balance sheets to reflect our intent to sell in
the future. Related interest income continues to be reported as interest income in our consolidated statements of comprehensive
income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Mortgage Loans” for additional
information about the measurement and recognition of interest income on our mortgage loans.
Debt Securities of Consolidated Trusts Held by Third Parties
We elected the fair value option for certain debt securities of consolidated trusts held by third parties. These consist of a
multifamily K Certificate where we are in a first loss position and certain REMIC interest-only mortgage-related debt
securities. We elected the fair value option on these debt instruments as they contain embedded derivatives that require
bifurcation. Fair value changes for debt securities of consolidated trusts held by third parties are recorded in other income in
our consolidated statements of comprehensive income. Related interest expense continues to be reported as interest expense in
our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — Debt Securities Issued” for additional information about the measurement and recognition of interest expense on
debt securities issued.
Other Debt
We elected the fair value option on our STACR debt notes to better reflect the economic offset that naturally results from
the debt due to changes in interest rates. Fair value changes for debt for which we have elected the fair value option are
recorded in other income in our consolidated statements of comprehensive income. Related interest expense continues to be
reported as interest expense in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Debt Securities Issued” for additional information about the measurement and
recognition of interest expense on debt securities issued.
The table below presents the fair value and UPB related to certain items for which we have elected the fair value option
at December 31, 2014 and 2013.
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