Freddie Mac 2012 Annual Report Download - page 304

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis. These
adjustments usually result from application of lower-of-cost-or-fair-value accounting or write-downs of individual assets.
These assets include impaired held-for-investment multifamily mortgage loans and REO, net.
The table below presents assets measured in our consolidated balance sheets at fair value on a non-recurring basis at
December 31, 2012 and 2011, respectively.
Table 16.3 — Assets Measured at Fair Value on a Non-Recurring Basis
Fair Value at December 31, 2012
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3) Total
Total Gains
(Losses)(3)
(in millions)
Assets measured at fair value on a non-recurring basis:
Mortgage loans:(1)
Held-for-investment ..................................... $— $— $1,025 $1,025 $ (49)
REO, net(2) .............................................. — — 776 776 (22)
Total assets measured at fair value on a non-recurring basis .......... $— $— $1,801 $1,801 $ (71)
Fair Value at December 31, 2011
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3) Total
Total Gains
(Losses)(3)
(in millions)
Assets measured at fair value on a non-recurring basis:
Mortgage loans:(1)
Held-for-investment ..................................... $— $— $1,380 $1,380 $ (16)
REO, net(2) .............................................. — — 3,146 3,146 (118)
Total assets measured at fair value on a non-recurring basis .......... $— $— $4,526 $4,526 $(134)
(1) Represents carrying value and related write-downs of loans for which adjustments are based on the fair value amounts. These loans consist of impaired
multifamily mortgage loans that are classified as held-for-investment and have a related valuation allowance.
(2) Represents the fair value and related losses of foreclosed properties that were measured at fair value subsequent to their initial classification as REO, net.
The carrying amount of REO, net was written down to fair value of $0.8 billion, less estimated costs to sell of $50 million (or approximately
$0.7 billion) at December 31, 2012. The carrying amount of REO, net was written down to fair value of $3.1 billion, less estimated costs to sell of
$221 million (or approximately $2.9 billion) at December 31, 2011.
(3) Represents the total net gains (losses) recorded on items measured at fair value on a non-recurring basis as of December 31, 2012 and 2011, respectively.
Valuation Processes and Controls Over Fair Value Measurement
We have control processes designed to ensure that our fair value measurements are appropriate and reliable, that they
are based on observable inputs where possible, and that our valuation approaches are consistently applied and the
assumptions and inputs are reasonable. Our control processes provide a framework that ensures a segregation of duties and
oversight of our fair value methodologies, techniques, validation procedures, and results.
Groups within our Finance division, independent of our trading and investing function, execute and validate the
valuation processes and are responsible for determining the fair values of the majority of our financial assets and liabilities.
In determining fair value, we consider the credit risk of our counterparties in estimating the fair values of our assets and our
own credit risk in estimating the fair values of our liabilities. The fair values determined by our Finance division are further
verified by an independent group within our Enterprise Risk Management (ERM) division.
The validation procedures performed by ERM are intended to ensure that the prices we receive from third parties are
consistent with our observations of market activity, and that fair value measurements developed using internal data reflect the
assumptions that a market participant would use in pricing our assets and liabilities. These validation procedures include
performing a monthly independent verification of fair value measurements through independent modeling, analytics, and
comparisons to other market source data, if available. Where applicable, prices are back-tested by comparing actual
settlement prices to our fair value measurements. Analytical procedures include automated checks consisting of prior-period
variance analysis, comparisons of actual prices to internally calculated expected prices based on observable market changes,
analysis of changes in pricing ranges, and relative value and yield comparisons using our proprietary models. Thresholds are
set for each product category by ERM to identify exceptions that require further analysis. If a price is outside of our
established thresholds, we perform additional validation procedures, including supplemental analytics and/or follow up
299 Freddie Mac