Freddie Mac 2012 Annual Report Download - page 198

the adequacy of third-party credit enhancements, year of origination, certain macroeconomic data, and available economic
data related to multifamily real estate, including apartment vacancy and rental rates.
Multifamily loans evaluated collectively for impairment are aggregated into book year vintages and measured by
benchmarking published historical commercial mortgage data to those vintages based upon some of the factors listed above.
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. As a result, 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
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of
certain assets and liabilities on a recurring or non-recurring basis. 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 defines fair value, establishes a framework for
measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This accounting guidance
also establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
based on the assumptions a market participant would use at the measurement date. Fair value measurements under this
hierarchy are distinguished among quoted market prices, observable inputs, and unobservable inputs. The measurement of
fair value requires management to make judgments and assumptions. 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 comprehensive income as well as our consolidated
fair value balance sheets. See “NOTE 16: 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 evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter 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. As discussed further below, certain other-than-temporary impairment losses are recognized in earnings.
These losses are recorded within our consolidated statements of comprehensive income as net impairment of available-for-
sale securities recognized in earnings.
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 the security’s
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 our available-for-sale securities in an unrealized loss position at December 31, 2012, 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. In cases where such an assertion cannot be made, the security’s entire decline in fair value is
deemed to be other-than-temporary and is recorded within our consolidated statements of comprehensive income as net
impairment of available-for-sale securities recognized in earnings.
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