Freddie Mac 2012 Annual Report Download - page 216

controlling financial interest exists varies depending on whether the entity is a VIE or non-VIE. A VIE is an entity: (a) that
has a total equity investment at risk that is not sufficient to finance its activities without additional subordinated financial
support provided by another party; or (b) where the group of equity holders does not have: (i) the power, through voting
rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance;
(ii) the obligation to absorb the entity’s expected losses; or (iii) the right to receive the entity’s expected residual returns.
Our policy is to consolidate VIEs in which we hold a controlling financial interest and are therefore deemed to be the
primary beneficiary. An enterprise has a controlling financial interest in, and thus is deemed to be the primary beneficiary of,
a VIE if it has both: (a) the power to direct the activities of the VIE that most significantly impact its economic performance;
and (b) exposure to losses or benefits of the VIE that could potentially be significant to the VIE. We perform ongoing
assessments to determine if we are the primary beneficiary of the VIEs with which we are involved and, as such, conclusions
may change over time as the nature and extent of our involvement changes.
We use securitization trusts in our securities issuance process that are VIEs. We are the primary beneficiary of trusts
that issue our single-family PCs and certain Other Guarantee Transactions. See “NOTE 3: VARIABLE INTEREST
ENTITIES” for more information. When we transfer assets into a VIE that we consolidate at the time of the transfer (or
shortly thereafter), we recognize the assets and liabilities of the VIE at the amounts that they would have been recognized if
they had not been transferred, and no gain or loss is recognized on these transfers. For all other VIEs that we consolidate, we
recognize the assets and liabilities of the VIE at fair value, and we recognize a gain or loss for the difference between: (a) the
fair value of the consideration paid and the fair value of any noncontrolling interests held by third parties; and (b) the net
amount, as measured on a fair value basis, of the assets and liabilities consolidated.
For entities that are not VIEs, the usual condition of a controlling financial interest is ownership of a majority voting
interest in an entity. We use the equity method of accounting for entities over which we have the ability to exercise
significant influence, but not control.
Fair Value Measurements
Consistent with the accounting guidance for fair value measurements and disclosures, we use a three-level fair value
hierarchy to measure the fair value of assets and liabilities. Fair value represents the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value
measurements under this hierarchy are distinguished among quoted market prices, observable inputs, and unobservable
inputs. We use quoted market prices and valuation techniques that seek to maximize the use of observable inputs, where
available, and minimize the use of unobservable inputs. Our inputs are based on the assumptions a market participant would
use in valuing the asset or liability. Assets and liabilities are classified in their entirety within the fair value hierarchy based
on the lowest level input that is significant to the fair value measurement. See “NOTE 16: FAIR VALUE DISCLOSURES”
for additional information regarding the fair value measurements and the hierarchy.
Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities
Overview
When we securitize single-family mortgages that we purchase, we issue mortgage-related securities called PCs that can
be sold to investors or held by us. Guarantor swaps are transactions where financial institutions exchange mortgage loans for
PCs backed by these mortgage loans. Multilender swaps are similar to guarantor swaps, except that formed PC pools include
loans that are contributed by more than one party. We issue PCs through various swap-based exchanges significantly more
often than through cash-based transfers. We issue REMICs and Other Structured Securities in transactions in which securities
dealers or investors sell us mortgage-related assets in exchange for REMICs and Other Structured Securities. We also issue
Other Guarantee Transactions to third parties in exchange for non-Freddie Mac mortgage-related securities.
PCs
Our PCs are pass-through debt securities that represent undivided beneficial interests in a pool of mortgages held by a
securitization trust. For our fixed-rate PCs, we guarantee the timely payment of interest and principal. For our ARM PCs, we
guarantee the timely payment of the weighted average coupon interest rate for the underlying mortgage loans. We do not
guarantee the timely payment of principal for ARM PCs; however, we do guarantee the full and final payment of principal.
Various types of fixed income investors purchase our PCs, including pension funds, insurance companies, securities
dealers, money managers, REITs, and commercial banks. PCs differ from most other fixed-income securities in several ways.
211 Freddie Mac