Freddie Mac 2015 Annual Report Download - page 128

Management's Discussion and Analysis Risk Management | MRS Credit Risk
Freddie Mac 2015 Form 10-K 126
Other-Than-Temporary Impairment of Available-For-Sale Mortgage-Related Securities
We evaluate our available-for-sale securities, including non-agency mortgage-related securities, in an
unrealized loss position, as of each balance sheet date, to determine whether the decline in value is
other-than-temporary. An unrealized loss exists when the fair value of a security is less than its amortized
cost basis. Other-than-temporary impairment is considered to have occurred if the fair value of the
security is less than its amortized cost basis and we intend to sell the security or it is more likely than not
that we will be required to sell the security prior to recovery of its amortized cost basis. Under these
circumstances, the security's entire decline in fair value is deemed other-than-temporary and is
recognized in earnings.
We determine the population of securities that we intend to sell as of each balance sheet date. To
determine this population, we use management judgment, based on a variety of factors, including market
conditions, current operational plans, models and strategies and whether such securities are subject to
FHFA-led lawsuits or other loss mitigation measures. Changes in our operational plans, models or
strategies could change the population of securities we intend to sell and could have a potentially
significant impact on earnings.
If we do not intend to sell the security or it is not more likely than not that we will be required to sell the
security prior to recovery of its amortized cost basis, the unrealized loss is separated into two
components, the amount representing the credit loss and the amount related to all other factors. The
other-than-temporary impairment amount related to the credit loss is recognized in earnings, while the
amount related to all other factors, such as interest rate changes, is recorded to other comprehensive
income, net of taxes. The credit-related impairment is calculated as the difference between the present
value of expected future cash flows at the time of impairment, including the estimated proceeds from
bond insurance, and the amortized cost basis of the security prior to considering credit losses.
The evaluation of whether an unrealized loss is other-than-temporary requires significant judgment,
assumptions, and consideration of numerous factors that may change over time. For example, the timing
of our recognition of principal cash shortfalls varies based on the structure of our investments, as many of
the trusts that issued non-agency mortgage-related securities were structured so that realized collateral
losses in excess of structural credit enhancements are not passed on to investors until the investment
matures. In addition, our investments in non-agency mortgage-related securities backed by subprime,
option ARM, and Alt-A loans were structured to include credit enhancements, particularly through
subordination and other structural enhancements. We may also have credit enhancements through bond
insurance on certain non-agency mortgage-related securities. As it is difficult to estimate the future
performance of loans and mortgage-related securities with a high degree of assurance, actual results
could materially differ from our expectations.
The following table summarizes the impairment recognized in earnings for our available-for-sale
mortgage-related securities.
Year Ended December 31,
(in millions) 2015 2014 2013
Net impairment of available-for-sale securities recognized in earnings:
Intent to sell $ 240 $817 $568
Other 52 121 942
Total net impairment of available-for-sale securities recognized in earnings $ 292 $938 $1,510