Freddie Mac 2011 Annual Report Download - page 302

For mortgage-related securities and investments in securities that were selected for the fair value option and
subsequently classified as trading securities, the change in fair value is recorded in other gains (losses) on investment
securities recognized in earnings in our consolidated statements of income and comprehensive income. See “NOTE 7:
INVESTMENTS IN SECURITIES” for additional information regarding the net unrealized gains (losses) on trading
securities, which include gains (losses) for other items that are not selected for the fair value option. Related interest
income continues to be reported as interest income in our consolidated statements of income and comprehensive income.
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” for additional
information about the measurement and recognition of interest income on investments in securities.
Debt Securities with Fair Value Option Elected
We elected the fair value option for foreign-currency denominated debt and certain other debt securities. In the case
of foreign-currency denominated debt, we have entered into derivative transactions that effectively convert these
instruments to U.S. dollar denominated floating rate instruments. The fair value changes on these derivatives were
recorded in derivative gains (losses) in our consolidated statements of income and comprehensive income. We elected the
fair value option on these debt instruments to better reflect the economic offset that naturally results from the debt due to
changes in interest rates. We also elected the fair value option for certain other debt securities containing potential
embedded derivatives that required bifurcation.
The changes in fair value of debt securities with the fair value option elected were $91 million, $580 million, and
$(404) million for the years ended December 31, 2011, 2010, and 2009, respectively, which were recorded in gains
(losses) on debt recorded at fair value in our consolidated statements of income and comprehensive income. The changes
in fair value related to fluctuations in exchange rates and interest rates were $89 million, $583 million, and $(204) million
for the years ended December 31, 2011, 2010, and 2009, respectively. The remaining changes in the fair value of
$2 million, $(3) million, and $(200) million were attributable to changes in credit risk for the years ended December 31,
2011, 2010, and 2009 respectively.
The change in fair value attributable to changes in credit risk was primarily determined by comparing the total
change in fair value of the debt to the total change in fair value of the interest-rate and foreign-currency derivatives used
to hedge the debt. Any difference in the fair value change of the debt compared to the fair value change in the derivatives
is attributed to credit risk.
The difference between the aggregate fair value and aggregate UPB for long-term debt securities with fair value
option elected was $43 million and $108 million at December 31, 2011 and 2010, respectively. Related interest expense
continues to be reported as interest expense in our consolidated statements of income and comprehensive income. See
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Debt Securities Issued” for additional
information about the measurement and recognition of interest expense on debt securities issued.
Multifamily Held-For-Sale Mortgage Loans with Fair Value Option Elected
We elected the fair value option for multifamily mortgage loans that were purchased for securitization. Through this
channel, we acquire loans that we intend to securitize and sell to CMBS investors. While this is consistent with our
overall strategy to expand our multifamily business, it differs from our previous buy-and-hold strategy with respect to
multifamily loans held-for-investment. Therefore, these multifamily mortgage loans were classified as held-for-sale
mortgage loans in our consolidated balance sheets to reflect our intent to sell in the future.
We recorded $828 million, $(1) million, and $(81) million from the change in fair value in gains (losses) on
mortgage loans recorded at fair value in other income in our consolidated statements of income and comprehensive
income for the years ended December 31, 2011, 2010, and 2009 respectively. The changes in fair value of these loans
were primarily attributable to changes in interest rates and other non-credit related items such as liquidity. The changes in
fair value attributable to credit risk were not material given that these loans were generally originated within the past six
to twelve months and have not seen a change in their credit characteristics.
The difference between the aggregate fair value and the aggregate UPB for multifamily held-for-sale loans with the
fair value option elected was $195 million and $(311) million at December 31, 2011 and 2010, respectively. Related
interest income continues to be reported as interest income in our consolidated statements of income and comprehensive
income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Mortgage Loans” for additional
information about the measurement and recognition of interest income on our mortgage loans.
297 Freddie Mac