Freddie Mac 2015 Annual Report Download - page 255

Financial Statements Notes to the Consolidated Financial Statements | Note 6
Freddie Mac 2015 Form 10-K 253
Other-than-temporary impairment is considered to have occurred if the fair value of the security lot is less
than its amortized cost basis and we either intend to sell the security or more likely than not will be
required to sell the security lot prior to recovery of its amortized cost basis. Under these circumstances,
the security’s entire decline in fair value is deemed to be other-than-temporary and is recorded within our
consolidated statements of comprehensive income as net impairment of available-for-sale securities
recognized in earnings.
If we do not intend to sell the security and we believe it is not more likely than not that we will be required
to sell prior to recovery of the security’s amortized cost basis, we recognize only the credit component of
other-than-temporary impairment in earnings and the amounts attributable to all other factors are
recorded in AOCI. The credit component represents the amount by which the present value of cash flows
expected to be collected from the security is less than its amortized cost basis. The present value of cash
flows expected to be collected represents our estimate of future contractual cash flows that we expect to
collect, discounted at the security’s original effective interest rate or, if applicable, the effective interest
rate determined based on significantly improved cash flows subsequent to a prior other-than-temporary
impairment.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary
requires significant management judgments, assumptions, and consideration of numerous factors. We
perform an evaluation on a security lot basis considering all available information. The relative importance
of this information varies based on the facts and circumstances surrounding each security, as well as the
economic environment at the time of assessment.
Our net impairment on available-for-sale securities during 2015 includes certain securities that we have
the intent to sell prior to the recovery of the security's amortized cost basis. For the remaining available-
for-sale securities in an unrealized loss position at December 31, 2015, we have asserted that we have
no intent to sell and that we believe it is not more likely than not that we will be required to sell the
security before recovery of its amortized cost basis.
Freddie Mac and Fannie Mae Securities
We hold these securities that are in an unrealized loss position at least to recovery and typically to
maturity. As the principal and interest on these securities are guaranteed, and we do not intend to sell
these securities, and it is not more likely than not that we will be required to sell such securities before a
recovery of the securities' amortized cost basis, we consider these unrealized losses to be temporary.
Commercial Mortgage-Backed Securities
CMBS are exposed to stresses in the commercial real estate market. We use an external model that
utilizes underlying collateral performance, current and expected credit enhancements, and assumptions
about the underlying collateral cash flows to identify securities that may have an increased risk of failing
to make their contractual payments. While it is possible that, under certain conditions, collateral losses on
our CMBS for which we have not recorded an impairment charge could exceed our credit enhancement
levels and a principal or interest loss could occur, we do not believe that those conditions were likely as of
December 31, 2015.