Freddie Mac 2011 Annual Report Download - page 253

recognition of additional credit losses, these amounts were reclassified out of non-credit losses in AOCI and charged to
earnings. In certain instances, we recognized credit losses in excess of unrealized losses in AOCI.
The determination 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.
Important factors include, but are not limited to:
• whether we intend to sell the security and it is not more likely than not that we will be required to sell the security
before sufficient time elapses to recover all unrealized losses;
• loan level default modeling for single-family residential mortgages that considers individual loan characteristics,
including current LTV ratio, FICO score, and delinquency status, requires assumptions about future home prices
and interest rates, and employs internal default models and prepayment assumptions. The modeling for CMBS
employs third-party models that require assumptions about the economic conditions in the areas surrounding each
individual property; and
• security loss modeling combining the modeled performance of the underlying collateral relative to its current and
projected credit enhancements to determine the expected cash flows for each evaluated security.
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 “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 “Table 7.3 — Significant Modeled
Attributes for Certain Available-For-Sale 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.
Freddie Mac and Fannie Mae Securities
We record the purchase of mortgage-related securities issued by Fannie Mae as investments in securities in
accordance with the accounting guidance for investments in debt and equity securities. In contrast, our purchase of
mortgage-related securities that we issued (e.g., PCs, REMICs and Other Structured Securities, and Other Guarantee
Transactions) is recorded as either investments in securities or extinguishment of debt securities of consolidated trusts
depending on the nature of the mortgage-related security that we purchase. See “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Securitization Activities through Issuances of Freddie Mac Mortgage-
Related Securities” for additional information.
We hold these investments in securities that are in an unrealized loss position at least to recovery and typically to
maturity. As the principal and interest on these securities are guaranteed and 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
consider these unrealized losses to be temporary.
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans
We believe the unrealized losses on the non-agency mortgage-related securities we hold are a result of poor
underlying collateral performance, limited liquidity, and large risk premiums. We consider securities to be other-than-
temporarily impaired when future credit losses are deemed likely.
Our review of the securities backed by subprime, option ARM, and Alt-A and other loans includes loan level default
modeling and analyses of the individual securities based on underlying collateral performance, including the collectability
of amounts from bond insurers. In the case of bond insurers, we also consider factors such as the availability of capital,
generation of new business, pending regulatory action, credit ratings, security prices, and credit default swap levels traded
on the insurers. We consider loan level information including estimated current LTV ratios, FICO scores, and other loan
level characteristics. We also consider the differences between the loan level characteristics of the performing and non-
performing loan populations. For additional information regarding bond insurers, see “NOTE 16: CONCENTRATION OF
CREDIT AND OTHER RISKS — Bond Insurers.”
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