Freddie Mac 2012 Annual Report Download - page 309

guarantee fee is discounted based on the current OAS-to-benchmark interest rates for new guarantees, which are driven by
changes in our estimates of credit risk and changes in the credit profile of the multifamily guarantee portfolio. The significant
unobservable input used in the fair value measurement of the guarantee asset is the OAS-to-benchmark rates. Significant
increases (decreases) in the OAS in isolation would result in a significantly lower (higher) fair value measurement. The
guarantee asset is classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
All Other Assets and Liabilities
All other assets and, from time to time, other liabilities consist primarily of mortgage servicing rights. Mortgage
servicing rights are valued using a discounted cash flow technique by a third-party vendor that specializes in valuing and
brokering sales of mortgage servicing rights. Under this technique, the cash flows from the mortgage servicing rights are
discounted based on estimated prepayment rates, estimated costs to service both performing and non-performing loans, and
estimated servicing income per loan (including ancillary income). The significant unobservable inputs used in the fair value
measurement of mortgage servicing rights are the estimates of prepayment rates, costs to service per loan, and servicing
income per loan. Significant increases (decreases) in cost to service per loan, and prepayment rate in isolation would result in
a significantly lower (higher) fair value measurement. Significant increases (decreases) in servicing income per loan in
isolation would result in a significantly higher (lower) fair value measurement. Mortgage servicing rights are classified as
Level 3 as significant inputs used in the fair value measurement are unobservable.
REO, Net
REO, net consists primarily of single-family REO. REO, net is initially measured at its fair value less costs to sell, and
is subsequently measured at the lower of cost or fair value less costs to sell. REO, net is valued using an internal model.
Under this technique, our internal model uses actual disposition prices on REO for the past three months to determine the
average sales proceeds per property at the state level expressed as a fixed percentage based on the ratio of the disposition
price to the UPB of the associated loan immediately prior to our acquisition of the property. This fixed percentage is then
applied to the individual property to determine its fair value. Certain adjustments, such as state-level adjustments, are made
to the estimated fair value, as applicable. The significant unobservable input used in the fair value measurement of REO, net
is the historical average sales proceeds per property by state. Significant increases (decreases) in the historical average sales
proceeds per property by state in isolation would result in a significantly higher (lower) fair value measurement. REO, net is
classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Debt Securities of Consolidated Trusts Held by Third Parties, at Fair Value
We elected the fair value option for certain debt securities of consolidated trusts held by third parties. These consist of
certain multifamily K certificates. These are valued using either the median of external sources or a single external source
(which may be the counterparty to the transaction) and are classified as Level 2 due to market pricing that is observable. See
“Fair Value Option — Debt Securities of Consolidated Trusts Held by Third Parties” for additional information.
Other Debt, at Fair Value
We elected the fair value option for foreign-currency denominated debt instruments and certain other debt securities.
These are valued using either the median of external sources or a single external source (which may be the counterparty to
the transaction) and are classified as Level 3 due to the low volume and level of activity in the market for these types of debt
instruments. See “Fair Value Option — Other Debt” for additional information.
Quantitative Information about Level 3 Fair Value Measurements for Assets and Liabilities Measured at Fair Value
in Our Consolidated Balance Sheets
The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs
for assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) as of
December 31, 2012.
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