Freddie Mac 2009 Annual Report Download - page 244

Table 4.2 — Key Assumptions Used in Measuring the Fair Value of Guarantee Asset
(1)
Mean Valuation Assumptions 2009 2008 2007
For the Year Ended
December 31,
IRRs
(2)
................................................................................ 13.8% 12.3% 6.4%
Prepayment rates
(3)
....................................................................... 26.4% 15.5% 17.1%
Weighted average lives (years) ................................................................ 3.3 5.6 5.2
(1) Estimates based solely on valuations on our guarantee asset associated with single-family loans, which represent approximately 97% of the total
guarantee asset.
(2) IRR assumptions represent an unpaid principal balance weighted average of the discount rates inherent in the fair value of the recognized guarantee
asset. We estimated the IRRs using a model which employs multiple interest rate scenarios versus a single assumption.
(3) Although prepayment rates are simulated monthly, the assumptions above represent annualized prepayment rates based on unpaid principal balances.
The objective of the sensitivity analysis below is to present our estimate of the financial impact of an unfavorable
change in the input values associated with the determination of fair values of these retained interests. We do not use these
inputs in determining fair value of our retained interests as our measurements are principally based on third-party pricing
information. See “NOTE 18: FAIR VALUE DISCLOSURES” for further information on determination of fair values. The
weighted average assumptions within Table 4.3 represent our estimates of the assumed IRR and prepayment rates implied by
market pricing as of each period end and are derived using our internal models. Since we do not use these internal models
for determining fair value in our reported results under GAAP, this sensitivity analysis is hypothetical and may not be
indicative of actual results. In addition, the effect of a variation in a particular assumption on the fair value of the retained
interest is estimated independently of changes in any other assumptions. Changes in one factor may result in changes in
another, which might counteract the impact of the change.
Table 4.3 — Sensitivity Analysis of Retained Interests
2009 2008
As of December 31,
(dollars in millions)Retained Interests, Mortgage-Related Securities
Weighted average IRR assumptions ............................................................. 4.5% 4.7%
Impact on fair value of 100 bps unfavorable change ................................................ $(3,634) $(2,762)
Impact on fair value of 200 bps unfavorable change ................................................ $(7,008) $(5,366)
Weighted average prepayment rate assumptions ..................................................... 11.4% 37.3%
Impact on fair value of 10% unfavorable change . . . ................................................ $ (85) $ (177)
Impact on fair value of 20% unfavorable change . . . ................................................ $ (161) $ (323)
Retained Interests, Guarantee Asset (Single-Family Only)
Weighted average IRR assumptions ............................................................. 8.5% 21.1%
Impact on fair value of 100 bps unfavorable change ................................................ $ (382) $ (90)
Impact on fair value of 200 bps unfavorable change ................................................ $ (714) $ (177)
Weighted average prepayment rate assumptions ..................................................... 20.1% 33.1%
Impact on fair value of 10% unfavorable change . . . ................................................ $ (517) $ (357)
Impact on fair value of 20% unfavorable change . . . ................................................ $ (995) $ (689)
Changes in these IRR and prepayment rate assumptions are primarily driven by changes in interest rates. Interest rates
on conforming mortgage products declined in 2009, and resulted in a lower IRR on mortgage-related securities retained
interests. Lower mortgage rates typically induce borrowers to refinance their loan. Expectations of higher interest rates
resulted in a decrease in average prepayment assumptions on mortgage-related securities retained interests.
We receive proceeds in securitizations accounted for as sales for those securities sold to third parties. Subsequent to
these securitizations, we receive cash flows related to interest income and repayment of principal on the securities we retain
for investment. Regardless of whether our issued PC or Structured Security is sold to third parties or held by us for
investment, we are obligated to make cash payments to acquire foreclosed properties and certain delinquent or impaired
mortgages under our financial guarantees. Table 4.4 summarizes cash flows on retained interests related to securitizations
accounted for as sales.
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