Freddie Mac 2012 Annual Report Download - page 307

pricing and are classified as Level 2. However, certain CMBS valued using these techniques are classified as Level 3 when
there is a low volume or level of activity in the market for those securities.
Certain CMBS, primarily military housing revenue bonds, are valued using a risk-metric pricing technique, similar to
that described above for agency securities. The significant unobservable inputs used in the fair value measurement of these
CMBS securities are the key risk metrics. Significant increases (decreases) in key rate durations in isolation would result in a
significantly lower (higher) fair value measurement. These securities are classified as Level 3 as significant inputs used in the
fair value measurement are unobservable.
Subprime, Option ARM, and Alt-A and Other (Mortgage-Related); Obligations of States and Political Subdivisions; and
Manufactured Housing
Subprime, option ARM, and Alt-A and other securities consist of non-agency mortgage-related securities backed by
subprime, option ARM, and/or Alt-A and other collateral. Obligations of states and political subdivisions consist primarily of
housing revenue bonds. Manufactured housing securities consist of non-agency mortgage-related securities backed by loans
on manufactured housing properties. These types of securities are all valued based on the median of external sources and are
classified as Level 3 due to the low volume and level of activity in the markets for these securities.
Non-Mortgage-Related Securities
Asset-Backed Securities
Asset-backed securities consist primarily of private-label non-mortgage-related securities. These securities are valued
using the median of external sources. These securities have observable market pricing and are classified as Level 2.
Treasury Bills and Treasury Notes
Treasury bills and Treasury notes are valued using quoted prices in active markets for identical assets and are classified
as Level 1.
FDIC-Guaranteed Corporate Medium-Term Notes
FDIC-guaranteed corporate medium-term notes are securities that are guaranteed by the FDIC and therefore are
considered to have the credit risk of a U.S. federal agency. These securities are valued using the median of external sources.
These securities have observable market pricing and are classified as Level 2.
Mortgage Loans, Held-for-Sale
Mortgage loans, held-for-sale consist of multifamily mortgage loans with the fair value option elected and are measured
at fair value on a recurring basis. Mortgage loans, held-for-sale are primarily valued using market prices from a third-party
pricing service that uses a discounted cash flow technique. Under this technique, the pricing service forecasts cash flows for
the various mortgage loans and discounts them at a market rate, including a spread that is based on pricing data obtained
from purchases and sales of similar mortgage loans, adjusted based on the mortgage loan’s current LTV ratio and DSCR. The
significant unobservable inputs used in the fair value measurement of these loans are the current LTV ratio and DSCR.
Significant increases (decreases) in the current LTV ratio in isolation would result in a significantly lower (higher) fair value
measurement. Significant increases (decreases) in the DSCR in isolation would result in a significantly higher (lower) fair
value measurement. These loans are classified as Level 3 as significant inputs used in the fair value measurement are
unobservable.
Mortgage Loans, Held-for-Investment
Mortgage loans, held-for-investment are measured at fair value on a non-recurring basis and represent multifamily
mortgage loans that have been written down to the fair value of the underlying collateral due to impairment. The underlying
collateral is primarily valued using either an income capitalization technique or third-party appraisals.
Under the income capitalization technique, the collateral is valued by discounting the present value of future cash flows
by applying an overall capitalization rate to the forecasted net operating income. The significant unobservable input used in
the fair value measurement of these loans is the capitalization rate, which is determined through analysis of the DSCR.
Significant increases (decreases) in the capitalization rate in isolation would result in a significantly lower (higher) fair value
measurement.
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