Freddie Mac 2015 Annual Report Download - page 177

Management's Discussion and Analysis Critical Accounting Policies and Estimates
Freddie Mac 2015 Form 10-K 175
collectively using a statistically based model that evaluates a variety of factors affecting collectability,
including but not limited to current LTV ratios, loan product type, delinquency/default status and history,
and geographic location. Inputs used by the model are regularly updated for changes in the underlying
data, assumptions, and market conditions. We consider the output of this model together with other
information such as our expectations with respect to the following:
• Future levels of loan modifications;
• Future loan repurchases by seller/servicers;
• The adequacy of third-party credit enhancements;
• The effects of changes in government policies and programs;
• The effects of macroeconomic variables such as rates of unemployment; and
• The effects of home price changes on borrower behavior.
The inability to realize the benefits of our loss mitigation activities, a lower realized rate of seller/servicer
repurchases, declines in home prices, deterioration in the financial condition of our mortgage insurers, or
increases in delinquency rates would cause our losses to be significantly higher than those currently
estimated.
Individually impaired single-family loans include loans that have undergone a TDR and are measured for
impairment as the excess of our recorded investment in the loan over the present value of the expected
future cash flows. Our expectation of future cash flows incorporates many of the judgments indicated
above.
FAIR VALUE MEASUREMENTS
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. Assets and liabilities
within our consolidated financial statements measured at fair value include:
• Mortgage-related and non-mortgage related securities;
• Certain loans held-for-sale;
• Derivative instruments;
• Certain debt securities of consolidated trusts held by third parties and certain other debt; and
• Certain REO assets.
The accounting guidance for fair value measurements establishes a framework for measuring fair value,
and also establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value based on the assumptions a market participant would use at the measurement
date. Fair value measurements under this hierarchy are distinguished among quoted market prices,
observable inputs, and unobservable inputs. The measurement of fair value requires management to
make judgments and assumptions. The process for determining fair value using unobservable inputs is
generally more subjective and involves a higher degree of management judgment and assumptions than
the measurement of fair value using observable inputs. These judgments and assumptions may have a
significant effect on our measurements of fair value, and the use of different judgments and assumptions,
as well as changes in market conditions, could have a material effect on our consolidated statements of
comprehensive income and consolidated balance sheets. See Note 14 for additional information
regarding fair value hierarchy and measurements.