Freddie Mac 2009 Annual Report Download - page 197

We consider available information in determining the recovery period and anticipated holding periods for our available-
for-sale securities. An important underlying factor we consider in determining the period to recover unrealized losses on our
available-for-sale securities is the estimated life of the security. The amount of the total other-than-temporary impairment
related to credit is recorded within our consolidated statements of operations as net impairment of available-for-sale
securities recognized in earnings. The credit-related loss represents the amount by which the present value of cash flows
expected to be collected from the security is less than the amortized cost basis of the security. With regard to securities 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 amount of the
total other-than-temporary impairment related to non-credit-related factors is recognized, net of tax, in AOCI. Unrealized
losses on available-for-sale securities that are determined to be temporary in nature are recorded, net of tax, in AOCI.
For available-for-sale securities that are not deemed to be credit impaired, we perform additional analysis to assess
whether we intend to sell or would more likely than not be required to sell the security before the expected recovery of the
amortized cost basis. In most cases, 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. Where such an assertion has
not been made, the security’s decline in fair value is deemed to be other than temporary and the entire charge is recorded in
earnings.
Determination of whether an adverse change occurred involves judgment about expected prepayments and credit events.
While market prices and rating agency actions are factors that are considered in the impairment analysis, analysis of the
underlying collateral based on loss severity, default, prepayment and other borrower behavior assumptions serves as an
important factor in determining if an other-than-temporary impairment has occurred. Implicit in this analysis is information
relevant to expected cash flows (such as collateral performance and characteristics) that also underlies the other impairment
factors mentioned above, and we consider other available qualitative information when assessing whether an impairment is
other-than-temporary. See “NOTE 6: INVESTMENTS IN SECURITIES — Table 6.2 — Available-For-Sale Securities in a
Gross Unrealized Loss Position” to our consolidated financial statements for the length of time our available-for-sale
securities have been in an unrealized loss position. Also see “NOTE 6: INVESTMENTS IN SECURITIES — Table 6.3 —
Significant Modeled Attributes for Certain Non-Agency Mortgage-Related Securities” to our consolidated financial
statements for the modeled default rates and severities that were used to determine whether our senior interests in certain
non-agency mortgage-related securities would experience a cash shortfall.
We apply significant judgment in determining whether impairment loss recognition is appropriate. We believe our
judgments are reasonable. However, different judgments could have resulted in materially different impairment loss
recognition. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to our consolidated financial
statements and “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for more information on
impairment recognition on securities.
Prior to January 1, 2008, for securities accounted for under the accounting standards for investments in beneficial
interests in securitized financial assets, an impairment loss was recognized through gains (losses) on investment activity in
our consolidated statements of operations when there was both a decline in fair value below the carrying amount and an
adverse change in expected cash flows. Effective January 1, 2008, we elected the fair value option for available-for-sale
securities identified as within the scope of the accounting standards for investments in beneficial interests in securitized
financial assets, and record valuation changes to gains (losses) on investment activities in our consolidated statements of
operations in the period they occur, including increases in value. See “Valuation of a Significant Portion of Assets and
Liabilities — The Fair Value Option for Financial Assets and Financial Liabilities” for additional information.
LIHTC Partnership Investments
We review our LIHTC partnership investments for impairment on a quarterly basis and reduce them to fair value when
a decline in fair value below the recorded investment is deemed to be other than temporary. Our review considers a number
of factors, including but not limited to the severity and duration of the decline in fair value, remaining estimated federal
income tax credits and losses relative to the recorded investment, our intent and ability to hold the investment until a
recovery can be reasonably estimated to occur, our ability to use the losses and credits to offset income, and our ability to
realize value via sales of our LIHTC investments. Fair value is determined based on reference to market transactions;
however, there can be no assurance that we will be able to access these markets.
For additional information regarding impairment of our LIHTC partnership investments, see “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES” and “NOTE 5: VARIABLE INTEREST ENTITIES” to our consolidated
financial statements.
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