Freddie Mac 2011 Annual Report Download - page 196

Individually impaired multifamily loans are measured for impairment based on the fair value of the underlying
collateral, as reduced by estimated disposition costs, as multifamily loans are generally collateral-dependent and most
multifamily loans are non-recourse to the borrower. Non-recourse means generally that the cash flows of the underlying
property (including any associated credit enhancements) serve as the source of funds for repayment of the loan.
Fair Value Measurements
Assets and liabilities within our consolidated financial statements measured at fair value include: (a) mortgage-related
and non-mortgage related securities; (b) mortgage loans held-for-sale; (c) derivative instruments; (d) debt securities
denominated in foreign currencies and certain other debt; and (e) REO. The accounting guidance for fair value
measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value based on the inputs a market participant would use at the measurement date. Fair value measurements
under this hierarchy are distinguished by quoted market prices, observable inputs, and unobservable inputs. The
measurement of fair value requires management to make judgments and assumptions and the process for determining fair
value using unobservable inputs is generally more subjective and involves a higher degree of management judgment and
assumptions than the measurement of fair value using observable inputs. These judgments and assumptions may have a
significant effect on our measurements of fair value, and the use of different judgments and assumptions, as well as
changes in market conditions, could have a material effect on our consolidated statements of income and comprehensive
income as well as our consolidated fair value balance sheets. For information regarding our fair value methods and
assumptions, see “NOTE 17: FAIR VALUE DISCLOSURES” and “FAIR VALUE MEASUREMENTS AND ANALYSIS”
for additional information regarding fair value hierarchy and measurements.
Impairment Recognition on Investments in Securities
We recognize impairment losses on available-for-sale securities within our consolidated statements of income and
comprehensive income as net impairment of available-for-sale securities recognized in earnings when we conclude that a
decrease in the fair value of a security is other-than-temporary.
We conduct quarterly reviews to evaluate each available-for-sale security that has an unrealized loss for other-than-
temporary impairment. An unrealized loss exists when the current fair value of an individual security is less than its
amortized cost basis. We recognize other-than-temporary impairment in earnings if one of the following conditions exists:
(a) we have the intent to sell the security; (b) it is more likely than not that we will be required to sell the security before
recovery of its unrealized loss; or (c) we do not expect to recover the amortized cost basis of the security. If we do not
intend to sell the security and we believe it is not more likely than not that we will be required to sell prior to recovery of
its unrealized loss, we recognize only the credit component of other-than-temporary impairment in earnings and the
amounts attributable to all other factors are recognized, net of tax, in AOCI. The credit component 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.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary requires
significant management judgments and assumptions and consideration of 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.
For information regarding important factors, judgments and assumptions, see “NOTE 7: INVESTMENTS IN
SECURITIES — Impairment Recognition on Investments in Securities.”
For the majority of our available-for-sale securities in an unrealized loss position, 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 entire decline in fair value is
deemed to be other-than-temporary and is recorded within our consolidated statements of income and comprehensive
income as net impairment of available-for-sale securities recognized in earnings.
See “NOTE 7: INVESTMENTS IN SECURITIES — Table 7.2 — Available-For-Sale Securities in a Gross
Unrealized Loss Position” for the length of time our available-for-sale securities have been in an unrealized loss position.
Also see “NOTE 7: INVESTMENTS IN SECURITIES — Table 7.3 — Significant Modeled Attributes for Certain Non-
Agency Mortgage-Related Securities” for the modeled default rates and severities that were used to determine whether our
senior interests in certain non-agency mortgage-related securities would experience a cash shortfall. See
“CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for more information on impairment
recognition on securities.
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