Freddie Mac 2011 Annual Report Download - page 188

When multiple prices are received, we use the median of the prices. The models and related assumptions used by the
dealers and pricing services are owned and managed by them. However, we have an understanding of their processes used
to develop the prices provided to us based on our ongoing due diligence. We periodically have discussions with our
dealers and pricing service vendors to maintain a current understanding of the processes and inputs they use to develop
prices. We make no adjustments to the individual prices we receive from third party pricing services or dealers for non-
agency mortgage-related securities beyond calculating median prices and discarding certain prices that are determined not
to be valid based on our validation processes. See “Controls over Fair Value Measurement” for information on our
validation processes.
Our valuation process and related fair value hierarchy assessments require us to make judgments regarding the
liquidity of the marketplace. These judgments are based on the volume of securities traded in the marketplace, the width
of bid/ask spreads and dispersion of prices on similar securities. As previously mentioned, the non-agency mortgage-
related security markets continued to be illiquid during 2011. We continue to utilize the prices on such securities provided
to us by various pricing services and dealers and believe that the procedures executed by the pricing services and dealers,
combined with our internal verification and analytical processes, help ensure that the prices used to develop our financial
statements are in accordance with the accounting guidance for fair value measurements and disclosures.
The prices provided to us consider the existence of credit enhancements, including bond insurance coverage, and the
current lack of liquidity in the marketplace. We also consider credit risk in the valuation of our assets and liabilities, with
the credit risk of the counterparty considered in asset valuations and our own institutional credit risk considered in
liability valuations. See “Consideration of Credit Risk in Our Valuation” for more information.
We periodically evaluate our valuation techniques and may change them to improve our fair value estimates, to
accommodate market developments or to compensate for changes in data availability and reliability or other operational
constraints. We review a range of market quotes from pricing services or dealers and perform analysis of internal
valuations on a monthly basis to confirm the reasonableness of the valuations.
The table below summarizes our assets and liabilities measured at fair value on a recurring basis at December 31,
2011 and 2010.
Table 70 — Summary of Assets and Liabilities at Fair Value on a Recurring Basis
Total GAAP
Recurring
Fair Value
Percentage in
Level 3
Total GAAP
Recurring
Fair Value
Percentage in
Level 3
2011 2010
December 31,
(dollars in millions)
Assets:
Investments in securities:
Available-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210,659 28% $232,634 30%
Trading, at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,830 4 60,262 5
Mortgage loans:
Held-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,710 100 6,413 100
Derivative assets, net
(1)
........................................... 118 — 143 —
Other assets:
Guarantee asset, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752 100 541 100
All other, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 100 235 100
Total assets carried at fair value on a recurring basis
(1)
. . . . . . . . . . . . . . . . . . $280,220 23 $300,228 25
Liabilities:
Debt securities recorded at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,015 —% $ 4,443 —%
Derivative liabilities, net
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435 — 1,209 3
Total liabilities carried at fair value on a recurring basis
(1)
. . . . . . . . . . . . . . . . $ 3,450 — $ 5,652 2
(1) Percentages by level are based on gross fair value of derivative assets and derivative liabilities before counterparty netting, cash collateral netting,
net trade/settle receivable or payable and net derivative interest receivable or payable.
Changes in Level 3 Recurring Fair Value Measurements
At December 31, 2011 and 2010, we measured and recorded at fair value on a recurring basis, assets of $72.5 billion
and $80.0 billion, respectively, or approximately 23% and 25% of total assets carried at fair value on a recurring basis,
using significant unobservable inputs (Level 3), before the impact of counterparty and cash collateral netting. Our Level 3
assets at December 31, 2011 primarily consist of non-agency mortgage-related securities. At December 31, 2011 and
2010, we also measured and recorded at fair value on a recurring basis, Level 3 derivative liabilities of $0.1 billion and
$0.8 billion, or less than 1% and 2%, respectively, of total liabilities carried at fair value on a recurring basis, before the
impact of counterparty and cash collateral netting.
183 Freddie Mac