Freddie Mac 2008 Annual Report Download - page 118

December 31, 2007. The increase in the net loss in AOCI was primarily attributable to unrealized losses on our non-agency
single-family mortgage-related securities backed by subprime, Alt-A and MTA mortgage loans, and CMBS with changes in
net unrealized losses, net of taxes, recorded in AOCI of $22.2 billion for 2008. In addition, we reclassified a net gain of
$0.9 billion, net of taxes, from AOCI to retained earnings (accumulated deficit) in adopting SFAS 159 that was partially
offset by the reclassification from AOCI to earnings of deferred losses related to closed cash flow hedges. See
“Mortgage-Related Investments Portfolio — Higher Risk Components of Our Mortgage-Related Investments Portfolio”
regarding mortgage-related securities backed by subprime loans, Alt-A and other loans and MTA loans.
CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS
Our consolidated fair value balance sheets include the estimated fair values of financial instruments recorded on our
consolidated balance sheets prepared in accordance with GAAP, as well as off-balance sheet financial instruments that
represent our assets or liabilities that are not recorded on our GAAP consolidated balance sheets. See “NOTE 17: FAIR
VALUE DISCLOSURES — Table 17.4 — Consolidated Fair Value Balance Sheets” to our consolidated financial statements
for our fair value balance sheets.
These off-balance sheet items predominantly consist of: (a) the unrecognized guarantee asset and guarantee obligation
associated with our PCs issued through our guarantor swap program prior to the implementation of FIN 45, (b) certain
commitments to purchase mortgage loans and (c) certain credit enhancements on manufactured housing asset-backed
securities. The fair value balance sheets also include certain assets and liabilities that are not financial instruments (such as
property and equipment and real estate owned, which are included in other assets) at their carrying value in accordance with
GAAP. During 2008 and 2007, our fair value results were impacted by several improvements in our approach for estimating
the fair value of certain financial instruments. See “OFF-BALANCE SHEET ARRANGEMENTS” and “CRITICAL
ACCOUNTING POLICIES AND ESTIMATES” as well as “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES” and “NOTE 17: FAIR VALUE DISCLOSURES” to our consolidated financial statements for more information
on fair values.
In conjunction with the preparation of our consolidated fair value balance sheets, we use a number of financial models.
See “RISK FACTORS,” “OPERATIONAL RISKS” and “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK — Interest-Rate Risk and Other Market Risks” for information concerning the risks associated with these
models.
Key Components of Changes in Fair Value of Net Assets
Our attribution of changes in the fair value of net assets relies on models, assumptions, and other measurement
techniques that evolve over time. Changes in the fair value of net assets from period to period result from returns (measured
on a fair value basis) on our investment and credit guarantee activities and capital transactions and are primarily attributable
to changes in a number of key components:
Investment Activities
Core Spread Income
Core spread income on our mortgage-related investments portfolio is a fair value estimate of the net current period
accrual of income from the spread between our mortgage-related investments and our debt, calculated on an option-adjusted
basis. OAS is an estimate of the yield spread between a given financial instrument and a benchmark (LIBOR, agency or
Treasury) yield curve, after consideration of potential variability in the instrument’s cash flows resulting from any options
embedded in the instrument, such as prepayment options.
Changes in Mortgage-To-Debt OAS
The fair value of our net assets can be significantly affected from period to period by changes in the net OAS between
the mortgage and agency debt sectors. The fair value impact of changes in OAS for a given period represents an estimate of
the net unrealized increase or decrease in fair value of net assets arising from net fluctuations in OAS during that period. We
do not attempt to hedge or actively manage the basis risk represented by the impact of changes in mortgage-to-debt OAS
because we generally hold a substantial portion of our mortgage assets for the long term and we do not believe that periodic
increases or decreases in the fair value of net assets arising from fluctuations in OAS will significantly affect the long-term
value of our mortgage-related investments portfolio. Our estimate of the effect of changes in OAS excludes the impact of
other market risk factors we actively manage, or economically hedge, to keep interest-rate risk exposure within prescribed
limits.
Asset-Liability Management Return
Asset-liability management return represents the estimated net increase or decrease in the fair value of net assets
resulting from net exposures related to the market risks we actively manage. We do not hedge all of the interest-rate risk that
exists at the time a mortgage is purchased or that arises over its life. The market risks to which we are exposed as a result of
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