Freddie Mac 2011 Annual Report Download - page 121

Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities
The table below provides information about the mortgage-related securities for which we recognized other-than-
temporary impairments in earnings.
Table 28 — Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings
12/31/2011 9/30/2011 6/30/2011 3/31/2011 12/31/2010
Three Months Ended
Net Impairment of Available-For-Sale Securities Recognized in Earnings
(in millions)
Subprime:
(1)
2006 & 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $472 $ 29 $ 67 $ 717 $1,192
Other years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2 3 17 15
Total subprime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 31 70 734 1,207
Option ARM:
2006 & 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 15 43 232 585
Other years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4 22 49 83
Total option ARM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 19 65 281 668
Alt-A:
2006 & 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 29 16 15 204
Other years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 10 15 23 161
Total Alt-A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 39 31 38 365
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 41 1 2 7
Total subprime, option ARM, Alt-A and other loans . . . . . . . . . . . . . . . . 585 130 167 1,055 2,247
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 27 183 135 19
Manufactured housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4 2 3 4
Total available-for-sale mortgage-related securities . . . . . . . . . . . . . . . . . . . $595 $161 $352 $1,193 $2,270
(1) Includes all first and second liens.
We recorded net impairment of available-for-sale mortgage-related securities recognized in earnings of $595 million
and $2.3 billion during the three months and year ended December 31, 2011, respectively, compared to $2.3 billion and
$4.3 billion during the three months and year ended December 31, 2010, respectively. We recorded these impairments
because our estimate of the present value of expected future credit losses on certain individual securities increased during
the periods. These impairments include $585 million and $1.9 billion of impairments related to securities backed by
subprime, option ARM, and Alt-A and other loans during the three months and year ended December 31, 2011,
respectively, compared to $2.2 billion and $4.2 billion during the three months and year ended December 31, 2010,
respectively. In addition, during the year ended December 31, 2011, these impairments include recognition of the fair
value declines related to certain investments in CMBS of $181 million as an impairment charge in earnings, as we have
the intent to sell these securities. For more information, see “NOTE 7: INVESTMENTS IN SECURITIES — Other-Than-
Temporary Impairments on Available-for-Sale Securities.”
While it is reasonably possible that collateral losses on our available-for-sale mortgage-related securities where we
have not recorded an impairment charge in earnings could exceed our credit enhancement levels, we do not believe that
those conditions were likely at December 31, 2011. Based on our conclusion that we do not intend to sell our remaining
available-for-sale mortgage-related securities in an unrealized loss position and it is not more likely than not that we will
be required to sell these securities before a sufficient time to recover all unrealized losses and our consideration of other
available information, we have concluded that the reduction in fair value of these securities was temporary at
December 31, 2011 and have recorded these fair value losses in AOCI.
The credit performance of loans underlying our holdings of non-agency mortgage-related securities has declined
since 2007. This decline has been particularly severe for subprime, option ARM, and Alt-A and other loans. Economic
factors negatively impacting the performance of our investments in non-agency mortgage-related securities include high
unemployment, a large inventory of seriously delinquent mortgage loans and unsold homes, tight credit conditions, and
weak consumer confidence during recent years. In addition, subprime, option ARM, and Alt-A and other loans backing
the securities we hold have significantly greater concentrations in the states that are undergoing the greatest economic
stress, such as California and Florida. Loans in these states undergoing economic stress are more likely to become
seriously delinquent and the credit losses associated with such loans are likely to be higher than in other states.
We rely on bond insurance, including secondary coverage, to provide credit protection on some of our investments in
non-agency mortgage-related securities. We have determined that there is substantial uncertainty surrounding certain bond
insurers’ ability to pay our future claims on expected credit losses related to our non-agency mortgage-related security
investments. This uncertainty contributed to the impairments recognized in earnings during the years ended December 31,
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