Freddie Mac 2010 Annual Report Download - page 222

conditions, collateral losses on our remaining available-for-sale securities for which we have not recorded an impairment
charge could exceed our credit enhancement levels and a principal or interest loss could occur, we do not believe that those
conditions were likely as of December 31, 2010.
In addition, we considered fair values at December 31, 2010, as well as any significant changes in fair value since
December 31, 2010 to assess if they were indicative of potential future cash shortfalls. In this assessment, we put greater
emphasis on categorical pricing information than on individual prices. We use multiple pricing services and dealers to price
the majority of the non-agency mortgage-related securities we hold. We observed significant dispersion in prices obtained
from different sources. However, we carefully consider individual and sustained price declines, placing greater weight when
dispersion is lower and less weight when dispersion is higher. Where dispersion is higher, other factors previously mentioned
receive greater weight. For further information, see “NOTE 20: FAIR VALUE DISCLOSURES.”
Commercial Mortgage-Backed Securities
CMBS are exposed to stresses in the commercial real estate market. We use external models to identify securities that
have an increased risk of failing to make their contractual payments. We then perform an analysis of the underlying
collateral on a security-by-security basis to determine whether we will receive all of the contractual payments due to us.
While it is reasonably possible that, under certain conditions, collateral losses on our CMBS for which we have not recorded
an impairment charge could exceed our credit enhancement levels and a principal or interest loss could occur, we do not
believe that those conditions were likely as of December 31, 2010. 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 recovery of the unrealized losses.
Obligations of States and Political Subdivisions
These investments consist of housing revenue bonds. We believe the unrealized losses on obligations of states and
political subdivisions are primarily a result of movements in interest rates and liquidity and risk premiums. We have
determined that the impairment of these securities is temporary based on our conclusion that 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. We believe that any credit risk related to these securities is minimal because of the issuer guarantees provided on
these securities.
Monoline Bond Insurance
We rely on monoline bond insurance, including secondary coverage, to provide credit protection on some of our non-
agency mortgage-related securities as well as our non-mortgage-related securities. Circumstances in which it is likely a
principal and interest shortfall will occur and there is substantial uncertainty surrounding a primary monoline bond insurer’s
ability to pay all future claims can give rise to recognition of other-than-temporary impairment recognized in earnings. See
“NOTE 19: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond Insurers” for additional information.
Other-Than-Temporary Impairments on Available-for-Sale Securities
Table 8.4 summarizes our net impairments of available-for-sale securities recognized in earnings by security type.
Table 8.4 — Net Impairment of Available-For-Sale Securities Recognized in Earnings
(1)
2010 2009 2008
Net Impairment of Available-For-Sale
Securities Recognized in Earnings
For the Year Ended December 31,
(in millions)
Mortgage-related securities:
Subprime .................................................................... $(1,769) $ (6,526) $ (3,621)
Option ARM .................................................................. (1,395) (1,726) (7,602)
Alt-A and other . . . ............................................................. (1,020) (2,572) (5,253)
CMBS . . .................................................................... (97) (137) —
Obligations of states and political subdivisions . .......................................... — — (68)
Manufactured housing ........................................................... (27) (51) (90)
Total other-than-temporary impairments on mortgage-related securities . . . ....................... (4,308) (11,012) (16,634)
Non-mortgage-related securities:
Asset-backed securities ........................................................... — (185) (1,048)
Total other-than-temporary impairments on non-mortgage-related securities ....................... — (185) (1,048)
Total other-than-temporary impairments on available-for-sale securities ............................ $(4,308) $(11,197) $(17,682)
(1) As a result of the adoption of an amendment to the accounting standards for investments in debt and equity securities on April 1, 2009, net impairment
of available-for-sale securities recognized in earnings for the nine months ended December 31, 2009 (which is included in the year ended December 31,
2009) and the year ended December 31, 2010 includes credit-related other-than-temporary impairments and other-than-temporary impairments on
securities which we intend to sell or it is more likely than not that we will be required to sell. In contrast, net impairment of available-for-sale securities
recognized in earnings for the three months ended March 31, 2009 (which is included in the year ended December 31, 2009) and the year ended
December 31, 2008 includes both credit-related and non-credit-related other-than-temporary impairments as well as other-than-temporary impairments
on securities for which we could not assert the positive intent and ability to hold until recovery of the unrealized losses.
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