Freddie Mac 2009 Annual Report Download - page 302

Fair Value Measurements (Level 3)
Level 3 measurements consist of assets and liabilities that are supported by little or no market activity where observable
inputs are not available. The fair value of these assets and liabilities is measured using significant inputs that are considered
unobservable. Unobservable inputs reflect assumptions based on the best information available under the circumstances. We
use valuation techniques that maximize the use of observable inputs, where available, and minimize the use of unobservable
inputs.
Our Level 3 items mainly consist of non-agency residential mortgage-related securities, CMBS, certain agency
mortgage-related securities and our guarantee asset. During 2009 the market for CMBS and during 2008 the market for
securities backed by subprime, option ARM, Alt-A and other loans became significantly less liquid, resulting in lower
transaction volumes, wider credit spreads and less transparency. We transferred our holdings of these securities into the
Level 3 category as inputs that were significant to their valuation became limited or unavailable. We concluded that the
prices on these securities received from pricing services and dealers were reflective of significant unobservable inputs. Our
guarantee asset is valued either through obtaining dealer quotes on similar securities or through an expected cash flow
approach. Because of the broad range of discounts for liquidity applied by dealers to these similar securities and because the
expected cash flow valuation approach uses significant unobservable inputs, we classified the guarantee asset as Level 3. See
“NOTE 4: RETAINED INTERESTS IN MORTGAGE-RELATED SECURITIZATIONS” for more information about the
valuation of our guarantee asset.
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