Freddie Mac 2009 Annual Report Download - page 250

The evaluation of unrealized losses on our available-for-sale portfolio for other-than-temporary impairment contemplates
numerous factors. We perform an evaluation on a security-by-security 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. Important factors include:
• loan level default modeling for single-family residential mortgages that considers individual loan characteristics,
including current LTV ratio, FICO score and delinquency status, requires assumptions about future home prices and
interest rates, and employs internal default and prepayment models. The modeling for CMBS employs third-party
models that require assumptions about the economic conditions in the areas surrounding each individual property;
• analysis of the performance of the underlying collateral relative to its credit enhancements using techniques that
require assumptions about future loss severity, default, prepayment and other borrower behavior. Implicit in this
analysis is information relevant to expected cash flows (such as collateral performance and characteristics). We
qualitatively consider available information when assessing whether an impairment is other-than-temporary;
• the length of time and extent to which the fair value of the security has been less than the book value and the
expected recovery period;
• the impact of changes in credit ratings (i.e., rating agency downgrades); and
• our conclusion that we do not intend to sell our available-for-sale securities and it is not more likely than not that we
will be required to sell these securities before sufficient time elapses to recover all unrealized losses.
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.
Freddie Mac and Fannie Mae Securities
These securities generally fit into one of two categories:
Unseasoned Securities — We frequently resecuritize agency securities, typically unseasoned pass-through securities. In
these resecuritization transactions, we typically retain an interest representing a majority of the cash flows, but consider the
resecuritization to be a sale of all of the securities for purposes of assessing if an impairment is other-than-temporary. As
these securities have generally been recently acquired, they generally have current coupon rates and prices close to par.
Consequently, any decline in the fair value of these agency securities is relatively small and could be recovered by small
interest rate changes. We expect that the recovery period would be in the near term. Notwithstanding this, we recognize
other-than-temporary impairments on any of these securities that are likely to be sold. This population is identified based on
our expectations of resecuritization volume and our eligible collateral. If any of the securities identified as likely to be sold
are in a loss position, other-than-temporary impairment is recorded as we could not assert that we would not sell such
securities prior to recovery. Any additional losses realized upon sale result from further declines in fair value subsequent to
the balance sheet date. For securities that we do not intend to sell and it is more likely than not that we will not be required
to sell such securities before a recovery of the unrealized losses, we expect to recover any unrealized losses by holding them
to recovery.
Seasoned Securities — These securities are not usually utilized for resecuritization transactions. We hold the seasoned
agency 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 unrealized losses, any unrealized loss will be recovered.
The unrealized losses on agency securities are primarily a result of movements in interest rates.
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