Freddie Mac 2012 Annual Report Download - page 298

NOTE 16: FAIR VALUE DISCLOSURES
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 guidance applies
whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value
measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for
the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.
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.
Fair Value Measurements
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that
prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest
priority, Level 1, to measurements based on quoted prices in active markets for identical assets or liabilities. The next highest
priority, Level 2, is given to measurements based on observable inputs other than quoted prices in active markets for identical
assets or liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs. 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.
During the first quarter of 2012, we adopted an amendment to the guidance pertaining to fair value measurements and
disclosure. The amendment changed the definition of the principal market to the perspective of the overall market for the
particular asset or liability being valued, with less emphasis on the perspective of the reporting entity. As a result of adopting
this guidance, we made a change to our principal market assessment for certain single-family mortgage loans, primarily for
loans that have not been modified and are delinquent four months or more or are in foreclosure. For these loans, we changed
our principal market assessment to the whole loan market. The resulting impact was a decrease of $13.8 billion to our fair
value of net assets in our consolidated fair value balance sheets.
During the fourth quarter of 2011, our fair value results as presented in our consolidated fair value balance sheets 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 as of
December 31, 2011.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents our assets and liabilities measured in our consolidated balance sheets at fair value on a
recurring basis subsequent to initial recognition, including instruments where we have elected the fair value option, as of
December 31, 2012 and 2011.
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