Freddie Mac 2012 Annual Report Download - page 258

enhancement levels and a principal or interest loss could occur, we do not believe that those conditions were likely as of
December 31, 2012.
Commercial Mortgage-Backed Securities
CMBS are exposed to stresses in the commercial real estate market. We use an external model to identify securities that
may have an increased risk of failing to make their contractual payments. We then perform an analysis of the underlying
collateral on a security-by-security basis to determine whether we will receive all of the contractual payments due to us.
While it is reasonably possible that, under certain conditions, collateral losses on our CMBS for which we have not recorded
an impairment charge could exceed our credit enhancement levels and a principal or interest loss could occur, we do not
believe that those conditions were likely as of December 31, 2012. We do not intend to sell our CMBS and it is not more
likely than not that we will be required to sell such securities before recovery of the unrealized losses.
Obligations of States and Political Subdivisions
These investments consist of housing revenue bonds. We believe the unrealized losses on obligations of states and
political subdivisions are primarily a result of movements in interest rates and liquidity and risk premiums. We have
determined that the impairment of these securities is temporary based on our conclusion that we do not intend to sell these
securities and it is not more likely than not that we will be required to sell such securities before a recovery of the unrealized
losses. We believe that any credit risk related to these securities is minimal because of the issuer guarantees provided on
these securities.
Bond Insurance
We rely on bond insurance to provide credit protection on some of our non-agency mortgage-related securities.
Circumstances in which: (a) it is likely a principal and interest shortfall will occur; and (b) there is substantial uncertainty
surrounding a bond insurer’s ability to pay all future claims can give rise to recognition of other-than-temporary impairment
recognized in earnings. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond Insurers” for
additional information.
Other-Than-Temporary Impairments on Available-for-Sale Securities
The table below summarizes our net impairment of available-for-sale securities recognized in earnings by security type.
The net impairment of available-for-sale securities recognized in earnings includes the impact of our implementation of a
third-party model, which enhanced our approach to estimating other-than-temporary impairment of our single-family non-
agency mortgage-related securities. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Change
in Estimate” for additional information.
Table 7.4 — Net Impairment of Available-For-Sale Securities Recognized in Earnings
Net Impairment of Available-For-Sale
Securities Recognized in Earnings
For the Year Ended December 31,
2012 2011 2010
(in millions)
Available-for-sale securities:
CMBS(1) ......................................................................... $ (138) $ (353) $ (97)
Subprime ........................................................................ (1,274) (1,315) (1,769)
Option ARM ..................................................................... (556) (424) (1,395)
Alt-A and other ................................................................... (196) (198) (1,020)
Manufactured housing .............................................................. (4) (11) (27)
Total other-than-temporary impairments on available-for-sale securities ............................ $(2,168) $(2,301) $(4,308)
(1) Includes $181 million of other-than-temporary impairments recognized in earnings for the year ended December 31, 2011, as we had the intent to sell
the related securities before recovery of their amortized cost basis.
The table below presents the changes in the unrealized credit-related other-than-temporary impairment component of
the amortized cost related to available-for-sale securities: (a) that we have written down for other-than-temporary
impairment; and (b) for which the credit component of the loss has been recognized in earnings. The credit-related other-
than-temporary impairment component of the amortized cost represents the difference between the present value of expected
future cash flows, including the estimated proceeds from bond insurance, and the amortized cost basis of the security prior to
considering credit losses. The beginning balance represents the other-than-temporary impairment credit loss component
253 Freddie Mac