Freddie Mac 2011 Annual Report Download - page 298

Recurring Fair Value Changes
For the year ended December 31, 2011, we did not have any significant transfers between Level 1 and Level 2 assets
or liabilities.
Our Level 3 items mainly consist of non-agency mortgage-related securities. Level 3 measurements consist of assets
and liabilities that are supported by little or no market activity where observable inputs generally are not available. The
fair value of these assets and liabilities is measured using significant inputs that are considered unobservable.
Unobservable inputs reflect assumptions based on the best information available under the circumstances. We use
valuation techniques that seek to maximize the use of observable inputs, where available, and minimize the use of
unobservable inputs. See “Valuation Methods and Assumptions Subject to Fair Value Hierarchy” for additional
information about the valuation methods and assumptions used in our fair value measurements.
During 2011, the fair value of our Level 3 assets decreased primarily due to: (a) monthly remittances of principal
repayments from the underlying collateral of non-agency mortgage-related securities; and (b) the widening of OAS levels
on single-family non-agency mortgage-related securities. During 2011, we had a net transfer into Level 3 assets of
$267 million, resulting from a change in valuation method for certain mortgage-related securities due to a lack of relevant
price quotes from dealers and third-party pricing services.
During 2010, our Level 3 assets decreased by $81.7 billion primarily due to the transfer of the majority of CMBS
from Level 3 to Level 2 and our adoption of new accounting guidance applicable to the accounting for transfers of
financial assets and consolidation of VIEs. During 2010, the CMBS market continued to improve and we observed
significantly less variability in fair value quotes received from dealers and third-party pricing services. In the fourth
quarter of 2010 we determined that these market conditions stabilized to a degree that we believe indicates that
unobservable inputs are no longer significant to the fair values of these securities and, as a result, we transferred
$51.3 billion of CMBS from Level 3 to Level 2. The adoption of amendments to the accounting guidance applicable to
the accounting for transfers of financial assets and the consolidation of VIEs resulted in the elimination of $28.8 billion in
our Level 3 assets on January 1, 2010, including: (a) certain mortgage-related securities issued by our consolidated trusts
that are held by us; and (b) the guarantee asset for guarantees issued to our consolidated trusts. In addition, we transferred
$0.4 billion of other Level 3 assets to Level 2 during 2010, resulting from improved liquidity and availability of price
quotes received from dealers and third-party pricing services.
The table below provides a reconciliation of the beginning and ending balances for assets and liabilities measured at
fair value using significant unobservable inputs (Level 3).
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