Freddie Mac 2012 Annual Report Download - page 194

restructuring), the fair value of the guarantee obligation is then measured using our internal credit models or third-party
market pricing. See “NOTE 16: FAIR VALUE DISCLOSURES — Valuation Techniques for Assets and Liabilities Not
Measured at Fair Value in Our Consolidated Balance Sheets, but for Which the Fair Value is Disclosed — Mortgage
Loans —Single-Family Loans” for additional details.
The decrease in the fair value of net assets, before capital transactions, during 2011, was primarily due to: (a) a decrease
in the fair value of our single-family loans due to our fourth quarter 2011 change in estimate discussed below, coupled with a
decline in seasonally adjusted home prices; and (b) unrealized losses from the widening of OAS levels on our single-family
non-agency mortgage-related securities. The decrease in fair value was partially offset by a tightening of OAS levels on our
agency securities and high estimated core spread income.
During the fourth quarter of 2011, our fair value results were affected by a change in estimate which increased the
implied capital costs included in our valuation of single-family mortgage loans due to a change in the estimation of a risk
premium assumption embedded in our modeled valuation of such loans. This change in estimate led to a $14.2 billion
decrease in our fair value measurement of mortgage loans.
When the OAS on a given asset widens, the fair value of that asset will typically decline, all other market factors being
equal. However, we believe such OAS widening has the effect of increasing the likelihood that, in future periods, we will
recognize income at a higher spread on this existing asset. The reverse is true when the OAS on a given asset tightens —
current period fair values for that asset typically increase due to the tightening in OAS, while future income recognized on
the asset is more likely to be earned at a reduced spread. However, as market conditions change, our estimate of expected fair
value gains and losses from OAS may also change, and the actual core spread income recognized in future periods could be
significantly different from current estimates.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or may be
recorded in amounts that differ from the full contract or notional amount of the transaction, and that may expose us to
potential losses in excess of the amounts recorded on our consolidated balance sheets.
Securitization Activities and Other Guarantee Commitments
We have certain off-balance sheet arrangements related to our securitization activities involving guaranteed mortgages
and mortgage-related securities, though most of our securitization activities are on-balance sheet. Our off-balance sheet
arrangements related to these securitization activities primarily consist of: (a) Freddie Mac mortgage-related securities
backed by multifamily loans; and (b) certain single-family Other Guarantee Transactions. We also have off-balance sheet
arrangements related to other guarantee commitments, including long-term standby commitments and liquidity guarantees.
We guarantee the payment of principal and interest on non-consolidated Freddie Mac mortgage-related securities we
issue and on mortgage loans covered by our other guarantee commitments. Our maximum potential off-balance sheet
exposure to credit losses relating to these securitization activities and the other guarantee commitments is primarily
represented by the UPB of the underlying loans and securities, which was $74.2 billion and $56.9 billion at December 31,
2012 and 2011, respectively. The UPB of non-consolidated mortgage-related securities backed by multifamily loans grew
significantly during 2012 and we expect that the balance of these off-balance sheet obligations will continue to increase in
2013 since this form of securitization is the primary business activity for our Multifamily segment.
As part of the guarantee arrangements pertaining to certain multifamily housing revenue bonds and securities backed by
multifamily housing revenue bonds, we provided commitments to advance funds, commonly referred to as “liquidity
guarantees,” which were $10.2 billion and $12.0 billion at December 31, 2012 and 2011, respectively. These guarantees
require us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are unable to be
remarketed. Any repurchased securities are pledged to us to secure funding until the securities are remarketed. We hold cash
and cash equivalents in excess of the amount of these commitments. At December 31, 2012 and 2011, there were no liquidity
guarantee advances outstanding. In addition, as part of the HFA initiative, we, together with Fannie Mae, provide liquidity
guarantees for certain variable-rate single-family and multifamily housing revenue bonds, under which Freddie Mac
generally is obligated to purchase 50% of any tendered bonds that cannot be remarketed within five business days.
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