FEDERAL HOME LOAN MORTGAGE CORP | 2013 | FY | 3

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.
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, 2013 and 2012.
Table 16.1 — Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
 
Fair Value at December 31, 2013
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable 
Inputs
(Level 3)
 
Netting
Adjustment(1)
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Freddie Mac
$
—

 
$
38,720

 
$
1,939

 
$
—

 
$
40,659

Fannie Mae
—

 
10,666

 
131

 
—

 
10,797

Ginnie Mae
—

 
155

 
12

 
—

 
167

CMBS
—

 
27,229

 
3,109

 
—

 
30,338

Subprime
—

 
—

 
27,499

 
—

 
27,499

Option ARM
—

 
—

 
6,574

 
—

 
6,574

Alt-A and other
—

 
—

 
8,706

 
—

 
8,706

Obligations of states and political subdivisions
—

 
—

 
3,495

 
—

 
3,495

Manufactured housing
—

 
—

 
684

 
—

 
684

Total available-for-sale securities, at fair value
—

 
76,770


52,149


—

 
128,919

Trading, at fair value:
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Freddie Mac
—

 
9,006

 
343

 
—

 
9,349

Fannie Mae
—

 
6,959

 
221

 
—

 
7,180

Ginnie Mae
—

 
24

 
74

 
—

 
98

Other
—

 
133

 
8

 
—

 
141

Total mortgage-related securities
—

 
16,122


646


—

 
16,768

Non-mortgage-related securities:
 
 
 
 
 
 
 
 
 
Treasury bills
2,254

 
—

 
—

 
—

 
2,254

Treasury notes
4,382

 
—

 
—

 
—

 
4,382

Total non-mortgage-related securities
6,636

 
—


—


—

 
6,636

Total trading securities, at fair value
6,636

 
16,122


646


—

 
23,404

Total investments in securities
6,636

 
92,892


52,795


—

 
152,323

Mortgage loans:
 
 
 
 
 
 
 
 
 
Held-for-sale, at fair value
—

 
8,727

 
—

 
—

 
8,727

Derivative assets, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps
—

 
10,009

 
10

 
—

 
10,019

Option-based derivatives
—

 
4,112

 
—

 
—

 
4,112

Other
—

 
99

 
1

 
—

 
100

Subtotal, before netting adjustments
—

 
14,220


11


—

 
14,231

Netting adjustments(1)
—

 
—

 
—

 
(13,168
)
 
(13,168
)
Total derivative assets, net
—

 
14,220


11


(13,168
)
 
1,063

Other assets:
 
 
 
 
 
 
 
 


Guarantee asset, at fair value
—

 
—

 
1,611

 
—

 
1,611

All other, at fair value
—

 
—

 
9

 
—

 
9

Total other assets
—

 
—


1,620


—

 
1,620

Total assets carried at fair value on a recurring basis
$
6,636

 
$
115,839


$
54,426


$
(13,168
)
 
$
163,733

Liabilities:
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
$
—

 
$
59

 
$
—

 
$
—

 
$
59

Other debt, at fair value
—

 
1,155

 
1,528

 
—

 
2,683

Derivative liabilities, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps
—

 
13,022

 
295

 
—

 
13,317

Option-based derivatives
—

 
201

 
3

 
—

 
204

Other
—

 
68

 
38

 
—

 
106

Subtotal, before netting adjustments
—

 
13,291


336


—

 
13,627

Netting adjustments(1)
—

 
—

 
—

 
(13,447
)
 
(13,447
)
Total derivative liabilities, net
—

 
13,291


336


(13,447
)
 
180

Total liabilities carried at fair value on a recurring basis
$
—

 
$
14,505


$
1,864


$
(13,447
)
 
$
2,922

 
 
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)
 
Netting
Adjustment(1)
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Freddie Mac
$
—

 
$
56,713

 
$
1,802

 
$
—

 
$
58,515

Fannie Mae
—

 
15,117

 
163

 
—

 
15,280

Ginnie Mae
—

 
193

 
16

 
—

 
209

CMBS
—

 
47,878

 
3,429

 
—

 
51,307

Subprime
—

 
—

 
26,457

 
—

 
26,457

Option ARM
—

 
—

 
5,717

 
—

 
5,717

Alt-A and other
—

 
—

 
10,904

 
—

 
10,904

Obligations of states and political subdivisions
—

 
—

 
5,798

 
—

 
5,798

Manufactured housing
—

 
—

 
709

 
—

 
709

Total available-for-sale securities, at fair value
—

 
119,901

 
54,995

 
—

 
174,896

Trading, at fair value:
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Freddie Mac
—

 
9,189

 
1,165

 
—

 
10,354

Fannie Mae
—

 
10,026

 
312

 
—

 
10,338

Ginnie Mae
—

 
39

 
92

 
—

 
131

Other
—

 
135

 
21

 
—

 
156

Total mortgage-related securities
—

 
19,389

 
1,590

 
—

 
20,979

Non-mortgage-related securities:
 
 
 
 
 
 
 
 
 
Asset-backed securities
—

 
292

 
—

 
—

 
292

Treasury bills
1,160

 
—

 
—

 
—

 
1,160

Treasury notes
19,061

 
—

 
—

 
—

 
19,061

Total non-mortgage-related securities
20,221

 
292

 
—

 
—

 
20,513

Total trading securities, at fair value
20,221

 
19,681

 
1,590

 
—

 
41,492

Total investments in securities
20,221

 
139,582

 
56,585

 
—

 
216,388

Mortgage loans:
 
 
 
 
 
 
 
 
 
Held-for-sale, at fair value
—

 
—

 
14,238

 
—

 
14,238

Derivative assets, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps
27

 
13,920

 
18

 
—

 
13,965

Option-based derivatives
—

 
10,097

 
—

 
—

 
10,097

Other
37

 
92

 
2

 
—

 
131

Subtotal, before netting adjustments
64

 
24,109


20


—

 
24,193

Netting adjustments(1)
—

 
—

 
—

 
(23,536
)
 
(23,536
)
Total derivative assets, net
64

 
24,109


20


(23,536
)
 
657

Other assets:
 
 
 
 
 
 
 
 
 
Guarantee asset, at fair value
—

 
—

 
1,029

 
—

 
1,029

All other, at fair value
—

 
—

 
114

 
—

 
114

Total other assets
—

 
—


1,143


—

 
1,143

Total assets carried at fair value on a recurring basis
$
20,285

 
$
163,691


$
71,986


$
(23,536
)
 
$
232,426

Liabilities:
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
$
—

 
$
70

 
$
—

 
$
—

 
$
70

Other debt, at fair value
—

 
—

 
2,187

 
—

 
2,187

Derivative liabilities, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps
5

 
30,213

 
26

 
—

 
30,244

Option-based derivatives
—

 
749

 
1

 
—

 
750

Other
3

 
52

 
40

 
—

 
95

Subtotal, before netting adjustments
8

 
31,014


67


—

 
31,089

Netting adjustments(1)
—

 
—

 
—

 
(30,911
)
 
(30,911
)
Total derivative liabilities, net
8

 
31,014


67


(30,911
)
 
178

Total liabilities carried at fair value on a recurring basis
$
8

 
$
31,084


$
2,254


$
(30,911
)
 
$
2,435

 
(1)
Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable. The net cash collateral posted was $871 million and $8.2 billion, respectively, at December 31, 2013 and 2012. The net interest receivable (payable) of derivative assets and derivative liabilities was $(0.6) billion and $(0.8) billion at December 31, 2013 and 2012, respectively, which was mainly related to interest rate swaps.
Changes in Fair Value Levels
We monitor the availability of observable market data to: (a) assess the appropriate classification of financial instruments within the fair value hierarchy; and (b) transfer assets and liabilities between Level 1, Level 2, and Level 3 accordingly. Observable market data includes, but is not limited to, quoted prices and market transactions. Changes in economic conditions or the volume and level of activity in a market generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changing the valuation technique used, are generally the cause of transfers between Level 1, 2, or 3.
For the year ended December 31, 2013, our transfers between Level 1 and Level 2 assets and liabilities were $27 million and $5 million, respectively. For the year ended December 31, 2012, our transfers between Level 1 and Level 2 assets and liabilities were less than $1 million.
The table below presents a reconciliation of all assets and liabilities measured in our consolidated balance sheets at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2013 and 2012, including transfers into and out of Level 3 assets and liabilities. The table also presents gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized in our consolidated statements of comprehensive income for Level 3 assets and liabilities for the years ended December 31, 2013 and 2012. When assets and liabilities are transferred between levels, we recognize the transfer as of the beginning of the period.

Table 16.2 — Fair Value Measurements of Assets and Liabilities Using Significant Unobservable Inputs
 
 
 
Year Ended December 31, 2013
 
 
 
Realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2013
 
Included in
earnings(1)(2)(3)(4)
 
Included in
other
comprehensive
income(1)
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(5)
 
Transfers
out of
Level 3(5)
 
Balance,
December 31,
2013
 
Unrealized
gains (losses)
still held(6)
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
$
1,802

 
$
2

 
$
109

 
$
111

 
$
239

 
$
—

 
$
(86
)
 
$
(152
)
 
$
25

 
$
—

 
$
1,939

 
$
—

Fannie Mae
163

 
—

 
(3
)
 
(3
)
 
—

 
—

 
—

 
(29
)
 
—

 
—

 
131

 
—

Ginnie Mae
16

 
—

 
—

 
—

 
—

 
—

 
—

 
(4
)
 
—

 
—

 
12

 
—

CMBS
3,429

 
6

 
(266
)
 
(260
)
 
—

 
—

 
(36
)
 
(24
)
 
—

 
—

 
3,109

 
—

Subprime
26,457

 
(1,260
)
 
6,648

 
5,388

 
—

 
—

 
(403
)
 
(3,943
)
 
—

 
—

 
27,499

 
(1,258
)
Option ARM
5,717

 
(61
)
 
1,694

 
1,633

 
—

 
—

 
(75
)
 
(701
)
 
—

 
—

 
6,574

 
(58
)
Alt-A and other
10,904

 
(128
)
 
1,341

 
1,213

 
—

 
—

 
(2,001
)
 
(1,410
)
 
—

 
—

 
8,706

 
(179
)
Obligations of states and political subdivisions
5,798

 
13

 
(188
)
 
(175
)
 
(10
)
 
—

 
(533
)
 
(1,585
)
 
—

 
—

 
3,495

 
—

Manufactured housing
709

 
(1
)
 
62

 
61

 
—

 
—

 
—

 
(86
)
 
—

 
—

 
684

 
(1
)
Total available-for-sale mortgage-related securities
54,995

 
(1,429
)

9,397


7,968


229


—


(3,134
)

(7,934
)

25


—


52,149


(1,496
)
Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Freddie Mac
1,165

 
(50
)
 
—

 
(50
)
 
1,271

 
269

 
(1,476
)
 
(64
)
 
1

 
(773
)
 
343

 
(53
)
Fannie Mae
312

 
(42
)
 
—

 
(42
)
 
2

 
—

 
(2
)
 
(25
)
 
43

 
(67
)
 
221

 
(42
)
Ginnie Mae
92

 
(1
)
 
—

 
(1
)
 
3

 
—

 
—

 
(15
)
 
—

 
(5
)
 
74

 
(1
)
Other
21

 
—

 
—

 
—

 
—

 
—

 
—

 
(3
)
 
—

 
(10
)
 
8

 
—

Total trading mortgage-related securities
1,590

 
(93
)

—


(93
)

1,276


269


(1,478
)

(107
)

44


(855
)

646


(96
)
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Held-for-sale, at fair value
14,238

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(14,238
)
 
—

 
—

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Guarantee asset(7)
1,029

 
4

 
—

 
4

 
—

 
688

 
—

 
(110
)
 
—

 
—

 
1,611

 
4

All other, at fair value
114

 
30

 
—

 
30

 
—

 
—

 
(135
)
 
—

 
—

 
—

 
9

 
7

Total other assets
1,143

 
34


—


34


—


688


(135
)

(110
)

—


—


1,620


11

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized and unrealized (gains) losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2013
 
Included in
earnings(1)(2)(3)(4)
 
Included in
other
comprehensive
income(1)
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(5)
 
Transfers
out of
Level 3(5)
 
Balance,
December 31,
2013
 
Unrealized
(gains)
losses
still held(6)
 
(in millions)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other debt, at fair value
$
2,187

 
$
11

 
$
—

 
$
11

 
$
—

 
$
1,130

 
$
—

 
$
(670
)
 
$
—

 
$
(1,130
)
 
$
1,528

 
$
4

Net derivatives(8)
47

 
301

 
—

 
301

 
—

 
12

 
—

 
(35
)
 
—

 
—

 
325

 
274

 
 
 
Year Ended December 31, 2012
 
 
 
Realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2012
 
Included in
earnings(1)(2)(3)(4)
 
Included in
other
comprehensive
income(1)
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Balance,
December 31,
2012
 
Unrealized
gains (losses)
still held(6)
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
$
2,048

 
$
—

 
$
18

 
$
18

 
$
—

 
$
—

 
$
—

 
$
(144
)
 
$
—

 
$
(120
)
 
$
1,802

 
$
—

Fannie Mae
172

 
—

 
1

 
1

 
—

 
—

 
—

 
(31
)
 
21

 
—

 
163

 
—

Ginnie Mae
12

 
—

 
—

 
—

 
—

 
—

 
—

 
(4
)
 
8

 
—

 
16

 
—

CMBS
3,756

 
76

 
(38
)
 
38

 
—

 
—

 
(331
)
 
(34
)
 
—

 
—

 
3,429

 
—

Subprime
27,999

 
(1,274
)
 
4,301

 
3,027

 
—

 
—

 
—

 
(4,569
)
 
—

 
—

 
26,457

 
(1,274
)
Option ARM
5,865

 
(552
)
 
1,417

 
865

 
—

 
—

 
(15
)
 
(998
)
 
—

 
—

 
5,717

 
(556
)
Alt-A and other
10,868

 
(196
)
 
1,822

 
1,626

 
—

 
—

 
—

 
(1,601
)
 
11

 
—

 
10,904

 
(196
)
Obligations of states and political subdivisions
7,824

 
19

 
108

 
127

 
—

 
—

 
(482
)
 
(1,671
)
 
—

 
—

 
5,798

 
—

Manufactured housing
766

 
(4
)
 
47

 
43

 
—

 
—

 
—

 
(100
)
 
—

 
—

 
709

 
(4
)
Total available-for-sale mortgage-related securities
59,310

 
(1,931
)

7,676


5,745


—


—


(828
)

(9,152
)

40


(120
)

54,995


(2,030
)
Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
1,866

 
(389
)
 
—

 
(389
)
 
25

 
95

 
(76
)
 
(206
)
 
92

 
(242
)
 
1,165

 
(390
)
Fannie Mae
538

 
(131
)
 
—

 
(131
)
 
(5
)
 
—

 
5

 
(35
)
 
—

 
(60
)
 
312

 
(131
)
Ginnie Mae
22

 
1

 
—

 
1

 
—

 
—

 
—

 
(16
)
 
98

 
(13
)
 
92

 
1

Other
90

 
—

 
—

 
—

 
—

 
18

 
(10
)
 
(3
)
 
—

 
(74
)
 
21

 
(1
)
Total trading mortgage-related securities
2,516

 
(519
)

—


(519
)

20


113


(81
)

(260
)

190


(389
)

1,590


(521
)
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-for-sale, at fair value
9,710

 
1,011

 
—

 
1,011

 
25,340

 
—

 
(21,764
)
 
(59
)
 
—

 
—

 
14,238

 
263

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset(7)
752

 
(23
)
 
—

 
(23
)
 
—

 
382

 
—

 
(82
)
 
—

 
—

 
1,029

 
(23
)
All other, at fair value
151

 
(37
)
 
—

 
(37
)
 
—

 
—

 
—

 
—

 
—

 
—

 
114

 
(37
)
Total other assets
903

 
(60
)
 
—

 
(60
)
 
—

 
382

 
—

 
(82
)
 
—

 
—

 
1,143

 
(60
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized and unrealized (gains) losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2012
 
Included in
earnings(1)(2)(3)(4)
 
Included in
other
comprehensive
income(1)
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Balance,
December 31,
2012
 
Unrealized
(gains) losses
still held(6)
 
(in millions)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other debt, at fair value
$
—

 
$
(16
)
 
$
—

 
$
(16
)
 
$
—

 
$
—

 
$
—

 
$
(812
)
 
$
3,015

 
$
—

 
$
2,187

 
$
(6
)
Net derivatives(8)
(17
)
 
30

 
—

 
30

 
—

 
3

 
—

 
(2
)
 
—

 
33

 
47

 
15


(1)
Changes in fair value for available-for-sale investment securities are recorded in AOCI, while gains and losses from sales are recorded in other gains (losses) on investment securities recognized in earnings on our consolidated statements of comprehensive income. For mortgage-related securities classified as trading, the realized and unrealized gains (losses) are recorded in other gains (losses) on investment securities recognized in earnings on our consolidated statements of comprehensive income.
(2)
Changes in fair value of derivatives not designated as accounting hedges are recorded in derivative gains (losses) on our consolidated statements of comprehensive income.
(3)
Changes in fair value of the guarantee asset are recorded in other income on our consolidated statements of comprehensive income.
(4)
For held-for-sale mortgage loans with the fair value option elected, gains (losses) on fair value changes and from sales of mortgage loans are recorded in other income on our consolidated statements of comprehensive income.
(5)
Transfers out of Level 3 during the year ended December 31, 2013 are due to: (a) our enhancement to our pricing methodology for multifamily mortgage loans, held-for-sale, to more directly reflect the increasingly observable nature of our exit market of loan securitization; and (b) an increased volume and level of activity in the market and availability of price quotes from dealers and third-party pricing services for: (i) trading mortgage-related securities; and (ii) STACR debt notes included in other debt at fair value.
(6)
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains and losses related to assets and liabilities classified as Level 3 that were still held at December 31, 2013 and 2012, respectively. Included in these amounts are credit-related other-than-temporary impairments recorded on available-for-sale securities.
(7)
We estimate that all amounts recorded for unrealized gains and losses on our guarantee asset relate to those guarantee asset amounts still recorded on our balance sheet. The amounts reflected as included in earnings represent the periodic fair value changes of our guarantee asset.
(8)
Net derivatives include derivative assets and derivative liabilities prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable and net derivative interest receivable or payable.
Assets 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 after our initial recognition. 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, 2013 and 2012, respectively.
Table 16.3 — Assets Measured at Fair Value on a Non-Recurring Basis
 
 
Fair Value at December 31,
 
2013
 
2012
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted Prices
in Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in millions)
Assets measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-for-investment
$
—

 
$
—

 
$
515

 
$
515

 
$
—

 
$
—

 
$
1,025

 
$
1,025

REO, net(2)
—

 
—

 
1,837

 
1,837

 
—

 
—

 
776

 
776

Total assets measured at fair value on a non-recurring basis
$
—

 
$
—

 
$
2,352

 
$
2,352

 
$
—

 
$
—

 
$
1,801

 
$
1,801

 
 
Total Gains (Losses)(3)
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
(in millions)
Assets measured at fair value on a non-recurring basis:
 
 
 
 
 
Mortgage loans:(1)
 
 
 
 
 
Held-for-investment
$
22

 
$
(49
)
 
$
(16
)
REO, net(2)
(50
)
 
(22
)
 
(118
)
Total gains (losses)
$
(28
)
 
$
(71
)
 
$
(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 $1.8 billion, less estimated costs to sell of $118 million (or approximately $1.7 billion) at December 31, 2013. 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.
(3)
Represents the total net gains (losses) recorded on items measured at fair value on a non-recurring basis for the years ended December 31, 2013, 2012, and 2011, respectively.
Valuation Processes and Controls Over Fair Value Measurement
We designed our control processes so 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 for segregation of duties and oversight of our fair value methodologies, techniques, validation procedures, and results.
Groups within our Finance division, independent of our business functions, 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, relative value comparisons, and comparisons using modeled yields. 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 discussions with the third-party provider. If we are unable to validate the reasonableness of a given price, we ultimately do not use that price for fair value measurements in our consolidated financial statements. These reviews are risk-based, cover all product categories, and are executed before we finalize the prices used in preparing our fair value measurements for our financial statements.
In addition to performing the validation procedures noted above, ERM provides independent risk governance over all valuation processes by establishing and maintaining a corporate-wide valuation control policy. ERM also independently reviews key judgments, methodologies, and valuation techniques to ensure compliance with established policies.
Our Valuation & Finance Model Committee (“Valuation Committee”), which includes representation from our business areas, ERM, and Finance divisions, provides senior management’s governance over valuation processes, methodologies, controls and fair value measurements. Identified exceptions are reviewed and resolved through the verification process and the fair value measurements used in the financial statements are approved at the Valuation Committee.
Where models are employed to assist in the measurement and verification of fair values, changes made to those models during the period are reviewed and approved according to the corporate model change governance process, with all material changes reviewed at the Valuation Committee. Inputs used by models are regularly updated for changes in the underlying data, assumptions, valuation inputs, and market conditions, and are subject to the valuation controls noted above.
Use of Third-Party Pricing Data in Fair Value Measurement
As discussed in the sections that follow, many of our valuation techniques use, either directly or indirectly, data provided by third-party pricing services or dealers. The techniques used by these pricing services and dealers to develop the prices generally are either: (a) a comparison to transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; or (b) industry-standard modeling, such as a discounted cash flow model. The prices provided by the pricing services and dealers reflect their observations and assumptions related to market activity, including risk premiums and liquidity adjustments. The models and related assumptions used by the pricing services and dealers are owned and managed by them and, in many cases, the significant inputs used in the valuation techniques are not reasonably available to us. However, we have an understanding of the processes and assumptions used to develop the prices based on our ongoing due diligence, which includes discussions with our vendors at least annually and often more frequently. We believe that the procedures executed by the pricing services and dealers, combined with our internal verification and analytical procedures, provide assurance that the prices used in our financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use in pricing our assets and liabilities. The price quotes we receive are non-binding both to us and to our counterparties.
In many cases, we receive prices from third-party pricing services or dealers and use those prices without adjustment, and the significant inputs used to develop the prices are not reasonably available to us. For a large majority of the assets and liabilities we value using pricing services and dealers, we obtain prices from multiple external sources and use the median of the prices to measure fair value. This technique is referred to below as “median of external sources.” The significant inputs used in the fair value measurement of assets and liabilities that are valued using the median of external sources pricing technique are the third-party prices. Significant increases (decreases) in any of the third-party prices in isolation may result in a significantly higher (lower) fair value measurement. In limited circumstances, we may be able to receive pricing information from only a single external source. This technique is referred to below as “single external source.”
In limited circumstances, we receive prices or pricing-related data that we adjust or use as an input to our models or other valuation techniques to measure fair value, as described in “Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance Sheets at Fair Value — Derivative Assets, Net and Derivative Liabilities, Net.” In other limited circumstances, we receive prices from a third-party provider and use those prices without adjustment, but the inputs used by the third-party provider to develop the prices are reasonably available to us, as described in “Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance Sheets at Fair Value — Mortgage Loans, Held-for-Sale” and “ — Other Assets and Other Liabilities.”
Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance Sheets at Fair Value
We categorize assets and liabilities that we measure and report in our consolidated balance sheets at fair value within the fair value hierarchy based on the valuation techniques used to derive the fair value and our judgment regarding the observability of the related inputs. The following is a description of the valuation techniques we use for fair value measurement and disclosure; the significant inputs used in those techniques (if applicable); our basis for classifying the measurements as Level 1, Level 2, or Level 3 of the fair value hierarchy; and, for those measurements classified as Level 3 of the hierarchy, a narrative description of the sensitivity of the fair value measurement to changes in significant unobservable inputs and a description of any interrelationships between those unobservable inputs. Although the sensitivities of the unobservable inputs are generally discussed below in isolation, interrelationships exist among the inputs such that a change in one unobservable input typically results in a change to one or more of the other inputs. For example, the most common interrelationship that impacts the majority of our fair value measurements is between future interest rates, prepayment speeds, and probabilities of default. Generally, a change in the assumption used for future interest rates results in a directionally opposite change in the assumption used for prepayment speeds and a directionally similar change in the assumption used for probabilities of default.
Each technique discussed below may not be used in a given reporting period, depending on the composition of our assets and liabilities measured at fair value and relevant market activity during that period.
Investments in Securities
Mortgage-Related Securities
Agency Securities
Agency securities, both trading and available-for-sale, consist of mortgage-related securities issued and guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae. The valuation techniques for agency securities vary depending on the type of security.
Fixed-rate single-class securities are valued using observable prices for similar securities in the TBA market. The observable TBA prices vary based on agency, term, coupon, and settlement date. In addition, we may adjust the TBA price accordingly based on matrices we receive from external dealers for securities with specific collateral characteristics if we observe those collateral characteristics to be trading at a premium or discount to the TBA price. Significant inputs used in this technique are the TBA prices and the security characteristics mentioned above. These securities have observable market pricing and are classified as Level 2.
Adjustable-rate single-class securities and the majority of multiclass securities are valued using the median of external sources. For certain multiclass securities, we are able to receive prices from only a single external source. Adjustable-rate single-class securities and the multiclass securities valued using these techniques generally have observable market prices and are classified as Level 2. However, certain multiclass securities 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 multiclass securities for which we are not able to obtain external prices due to limited relevant market activity are valued using a discounted cash flow technique. Under this technique, securities are valued by starting with a third-party market price for a similar security within our portfolio. We then use our proprietary prepayment and interest rate models to calculate an OAS for the similar security, which is used to determine the net present value of the projected cash flows for the security to be valued. The significant unobservable input used in the fair value measurement of these securities is the OAS. Significant increases (decreases) in the OAS 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.
Certain complex multiclass securities for which current cash flow information is not readily available are valued using a risk-metric pricing technique. Under this technique, securities are valued by starting with a prior period price and adjusting that price for market changes in certain key risk metrics such as key rate durations. If necessary, our judgment is applied to adjust the price based on specific security characteristics. The significant unobservable inputs used in the fair value measurement of these 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.
Commercial Mortgage-Backed Securities
The majority of our CMBS are valued using the median of external sources. For a small number of CMBS, we are able to receive prices from only a single external source. CMBS valued using these techniques generally have observable market 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.
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.
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 calibrated to the exit price for these loans as reflected in the K Certificate securitization market. 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 our recent securitization activity, which we have defined as our principal exit market. These loans are classified as Level 2 given the observable nature of our securitization pricing.
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.
Under the third-party appraisal technique, we use the prices provided by third-party appraisers without adjustment. The third-party appraisers consider the physical condition of the property and use comparable sales and other market data in determining the appraised value.
Impaired multifamily mortgage loans held-for-investment are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Derivative Assets, Net and Derivative Liabilities, Net
Derivative assets and derivative liabilities consist of interest-rate swaps, option-based derivatives, and other derivatives, such as exchange-traded futures, foreign-currency swaps, and certain forward purchase and sale commitments.
Interest-Rate Swaps
Interest-rate swaps consist of receive-fixed, pay-fixed, and basis swaps. The majority of our interest-rate swaps are valued using a discounted cash flow technique. Under this technique, interest-rate swaps are valued by using the appropriate yield curves to discount the expected cash flows of both the fixed and variable rate components of the swap contracts. The significant inputs used in the fair value measurement of these derivatives are market-based interest rates. These derivatives are classified as Level 2 as the significant inputs used in the fair value measurement are observable in active markets.
Option-Based Derivatives
Option-based derivatives consist of interest rate caps, interest rate floors, call swaptions, and put swaptions. We value the majority of our option-based derivatives using option-pricing models. Dealer-supplied interest rate volatility matrices are a key input into these models. Within each matrix, prices are provided for a range of option terms, swap terms, and strikes. Our models then interpolate to determine the volatility for each instrument and use that volatility as an input to the option-pricing model. These derivatives are classified as Level 2 as the significant inputs used are observable in active markets.
Other Derivatives
Other derivatives consist of exchange-traded futures, foreign-currency swaps, and certain forward purchase and sale commitments.
Exchange-traded futures are valued using quoted prices in active markets for identical assets or liabilities and are classified as Level 1.
Foreign-currency swaps are valued using a discounted cash flow technique. Under this technique, foreign-currency swaps are valued using yield curves derived from observable market data to calculate and discount the expected cash flows for the swap contracts. The significant inputs used in the fair value measurement of these derivatives are market-based interest rates and foreign currency exchange rates. These derivatives are classified as Level 2 as the significant inputs used in the fair value measurement are observable in active markets.
Certain purchase and sale commitments are also considered to be derivatives and are valued using the same techniques we use to value the underlying instruments we are committing to purchase or sell. These instruments generally have observable market pricing and are classified as Level 2. Valuation techniques for commitments to purchase or sell investment securities and to extinguish or issue debt securities of consolidated trusts are further discussed in “Investments in Securities.” Valuation techniques for commitments to purchase single-family mortgage loans are further discussed in “Valuation Techniques for Assets and Liabilities Not Measured in Our Consolidated Balance Sheets at Fair Value, but for Which the Fair Value is Disclosed — Mortgage Loans.”
Other Assets and Other Liabilities
Other assets consist of our guarantee asset related to guarantees issued to unconsolidated securitization trusts and mortgage servicing rights. Other liabilities, from time to time, consist of mortgage servicing rights.
Guarantee Asset
Our guarantee asset is primarily related to our multifamily guarantees. The multifamily guarantee asset is valued using a discounted cash flow technique. Under this technique, the present value of future cash flows related to our management and 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.
Our guarantee asset also consists of single family guarantees primarily related to long-term standby commitments, the vast majority of which is valued using the median of external sources. Under this technique, we obtain multiple price quotes from dealers, who provide estimates based on pricing for comparable benchmark securities with specific adjustments to reflect the unique characteristics of this asset class.
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 REO disposition prices for the prior three months, calibrated to the most recent month's disposition prices, 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. This fixed percentage is then applied to the UPB immediately prior to the acquisition to determine the fair value of the individual property. 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 where we are in a first loss position and certain REMIC interest-only mortgage-related 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 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 on: (a) STACR debt notes; (b) extendible variable-rate notes containing quarterly options for investors to extend the maturity of the notes; and (c) foreign-currency denominated debt instruments. Our STACR debt notes are valued using the median of external sources and are classified as Level 2 based on observable market prices. Extendible variable-rate notes and foreign-currency denominated debt 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 in Our Consolidated Balance Sheets at Fair Value
The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs for assets and liabilities measured in our consolidated balance sheets at fair value on a recurring basis using unobservable inputs (Level 3) as of December 31, 2013 and 2012.
Table 16.4 — Quantitative Information about Recurring Level 3 Fair Value Measurements
 
 
December 31, 2013
 
Total
Fair
Value
 
Level  3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs(1)
 
Type
 
Range
 
Weighted
Average
 
(dollars in millions)
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Investments in securities
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
Agency securities:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
$
1,547

 
Risk metric
 
Effective duration(2)
 
2.25 - 5.17 years
 
2.44 years

 
 
 
133

 
Single external source
 
External pricing source
 
$99.3 - $99.3
 
$
99.3

 
 
 
259

 
Other
 
 
 
 
 
 
Total Freddie Mac
$
40,659

 
1,939

 
 
 
 
 
 
 
 
Fannie Mae
 
 
91

 
Single external source
 
External pricing source
 
$110.5 - $110.5
 
$
110.5

 
 
 
26

 
Median of external sources
 
External pricing sources
 
$104.1 - $105.3
 
$
104.7

 
 
 
14

 
Other
 
 
 
 
 
 
Total Fannie Mae
10,797

 
131

 
 
 
 
 
 
 
 
Ginnie Mae
 
 
6

 
Median of external sources
 
 
 
 
 
 
 
 
 
6

 
Discounted cash flows
 
 
 
 
 
 
Total Ginnie Mae
167

 
12

 
 
 
 
 
 
 
 
CMBS
 
 
2,942

 
Single external source
 
External pricing source
 
$90.9 - $90.9
 
$
90.9

 
 
 
167

 
Other
 
 
 
 
 
 
Total CMBS
30,338

 
3,109

 
 
 
 
 
 
 
 
Subprime, option ARM, and Alt-A:
 
 
 
 
 
 
 
 
 
 
 
Subprime
 
 
25,367

 
Median of external sources
 
External pricing sources
 
$64.5 - $73.8
 
$
68.7

 
 
 
2,132

 
Other
 
 
 
 
 
 
Total subprime
27,499

 
27,499

 
 
 
 
 
 
 
 
Option ARM
 
 
4,995

 
Median of external sources
 
External pricing sources
 
$60.8- $67.0
 
$
64.4

 
 
 
705

 
Discounted cash flows
 
OAS
 
461 - 944 bps
 
729 bps

 
 
 
874

 
Other
 
 
 
 
 
 
Total option ARM
6,574

 
6,574

 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 


Alt-A and other
 
 
4,028

 
Single external source
 
External pricing source
 
$83.4 - $83.4
 
$
83.4

 
 
 
3,503

 
Median of external sources
 
External pricing sources
 
$72.5 - $79.1
 
$
75.7

 
 
 
1,175

 
Other
 
 
 
 
 
 
Total Alt-A and other
8,706

 
8,706

 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
 
 
3,067

 
Median of external sources
 
External pricing sources
 
$98.7 - $99.7
 
$
99.2

 
 
 
428

 
Other
 
 
 
 
 
 
Total obligations of states and political subdivisions
3,495

 
3,495

 
 
 
 
 
 
 
 
Manufactured housing
 
 
577

 
Median of external sources
 
External pricing sources
 
$86.7 - $92.8
 
$
89.7

 
 
 
107

 
Other
 
 
 
 
 
 
Total manufactured housing
684

 
684

 
 
 
 
 
 
 
 
Total available-for-sale mortgage-related securities
128,919

 
52,149

 
 
 
 
 
 
 
 
Trading, at fair value
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
Agency securities:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
297

 
Discounted cash flows
 
OAS
 
(5) - 9,441 bps
 
364 bps

 
 
 
46

 
Other
 
 
 
 
 
 
Total Freddie Mac
9,349

 
343

 
 
 
 
 
 
 
 
Fannie Mae
 
 
191

 
Discounted cash flows
 
OAS
 
(2,257) - 2,295 bps
 
199 bps

 
 
 
30

 
Other
 
 
 
 
 
 
Total Fannie Mae
7,180

 
221

 
 
 
 
 
 
 
 
Ginnie Mae
 
 
74

 
Median of external sources
 
 
 
 
 
 
Total Ginnie Mae
98

 
74

 
 
 
 
 
 
 
 
Other
 
 
7

 
Single external source
 
 
 
 
 
 
 
 
 
1

 
Other
 
 
 
 
 
 
Total other
141

 
8

 
 
 
 
 
 
 
 
Total trading mortgage-related securities
16,768

 
646

 
 
 
 
 
 
 
 
Total investments in securities
$
145,687

 
$
52,795

 
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset, at fair value
 
 
1,163

 
Discounted cash flows
 
OAS
 
16 - 202 bps
 
53 bps

 
 
 
448

 
Median of external sources
 
External pricing sources
 
$11.6 - $25.4
 
$
19.2

Total guarantee asset, at fair value
1,611

 
1,611

 
 
 
 
 
 
 
 
All other, at fair value
 
 
9

 
Other
 
 
 
 
 
 
Total all other, at fair value
9

 
9

 
 
 
 
 
 
 
 
Total other assets
1,620

 
1,620

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Other debt, at fair value
 
 
1,000

 
Single external source
 
External pricing source
 
$100.0 - $100.0
 
$
100.0

 
 
 
528

 
Median of external sources
 
External pricing sources
 
$100.0 - $100.1
 
100.0

Total other debt recorded at fair value
2,683

 
1,528

 
 
 
 
 
 
 
 
Net derivatives
 
 
283

 
Single external source
 
External pricing source
 
$0.8 - $0.8
 
$
0.8

 
 
 
37

 
Discounted cash flows
 
 
 
 
 
 
 
 
 
5

 
Other
 
 
 
 
 
 
Total net derivatives
(883
)
 
325

 
 
 
 
 
 
 
 
 
December 31, 2012
 
Total
Fair
Value
 
Level  3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs(1)
 
Type
 
Range
 
Weighted
Average
 
(dollars in millions)
 
 
 
 
 
 
 
 
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Investments in securities
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
Agency securities:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
$
1,477

 
Risk metric
 
Effective duration(2)
 
0.89 -1.98 years
 
0.89 years

 
 
 
325

 
Other
 
 
 
 
 
 
Total Freddie Mac
$
58,515

 
1,802

 
 
 
 
 
 
 
 
Fannie Mae
 
 
78

 
Median of external sources
 
External pricing sources
 
$103.9 - $106.0
 
$
105.2

 
 
 
65

 
Single external source
 
External pricing source
 
$116.0 - $116.0
 
$
116.0

 
 
 
20

 
Other
 
 
 
 
 
 
Total Fannie Mae
15,280

 
163

 
 
 
 
 
 
 
 
Ginnie Mae
 
 
8

 
Discounted cash flows
 
 
 
 
 
 
 
 
 
8

 
Median of external sources
 
 
 
 
 
 
Total Ginnie Mae
209

 
16

 
 
 
 
 
 
 
 
CMBS
 
 
2,462

 
Single external source
 
External pricing source
 
$99.4 - $99.4
 
$
99.4

 
 
 
432

 
Risk metric
 
Effective duration(2)
 
9.3 -14.8 years
 
12.0 years

 
 
 
535

 
Other
 
 
 
 
 
 
Total CMBS
51,307

 
3,429

 
 
 
 
 
 
 
 
Subprime, option ARM, and Alt-A:
 
 
 
 
 
 
 
 
 
 
 
Subprime
 
 
24,890

 
Median of external sources
 
External pricing sources
 
$54.4 - $64.4
 
$
59.2

 
 
 
1,567

 
Other
 
 
 
 
 
 
Total subprime
26,457

 
26,457

 
 
 
 
 
 
 
 
Option ARM
 
 
5,631

 
Median of external sources
 
External pricing sources
 
$43.8 - $52.6
 
$
47.9

 
 
 
86

 
Other
 
 
 
 
 
 
Total option ARM
5,717

 
5,717

 
 
 
 
 
 
 
 
Alt-A and other
 
 
8,562

 
Median of external sources
 
External pricing sources
 
$69.6 - $77.9
 
$
73.8

 
 
 
1,901

 
Single external source
 
External pricing source
 
$71.8 - $71.8
 
$
71.8

 
 
 
441

 
Other
 
 
 
 
 
 
Total Alt-A and other
10,904

 
10,904

 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
 
 
5,533

 
Median of external sources
 
External pricing sources
 
$102.3 - $103.2
 
$
102.7

 
 
 
265

 
Other
 
 
 
 
 
 
Total obligations of states and political subdivisions
5,798

 
5,798

 
 
 
 
 
 
 
 
Manufactured housing
 
 
693

 
Median of external sources
 
External pricing sources
 
$80.0 - $85.5
 
$
82.8

 
 
 
16

 
Other
 
 
 
 
 
 
Total manufactured housing
709

 
709

 
 
 
 
 
 
 
 
Total available-for-sale mortgage-related securities
174,896

 
54,995

 
 
 
 
 
 
 
 
Trading, at fair value
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
 
 
 
Agency securities:
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
1,112

 
Discounted cash flows
 
OAS
 
(33,702) - 3,251 bps
 
502 bps

 
 
 
53

 
Other
 
 
 
 
 
 
Total Freddie Mac
10,354

 
1,165

 
 
 
 
 
 
 
 
Fannie Mae
 
 
312

 
Discounted cash flows
 
OAS
 
(1,263) - 3,251 bps
 
810 bps

Total Fannie Mae
10,338

 
312

 
 
 
 
 
 
 
 
Ginnie Mae
 
 
87

 
Median of external sources
 
 
 
 
 
 
 
 
 
5

 
Other
 
 
 
 
 
 
Total Ginnie Mae
131

 
92

 
 
 
 
 
 
 
 
Other
 
 
12

 
Discounted cash flows
 
 
 
 
 
 
 
 
 
9

 
Median of external sources
 
 
 
 
 
 
Total other
156

 
21

 
 
 
 
 
 
 
 
Total trading mortgage-related securities
20,979

 
1,590

 
 
 
 
 
 
 
 
Total investments in securities
$
195,875

 
$
56,585

 
 
 
 
 
 
 
 
Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
Held-for-sale, at fair value
$
14,238

 
$
14,238

 
Discounted cash flows
 
DSCR
 
1.25 - 6.88
 
1.97

 
 
 
 
 
 
 
Current LTV
 
19% - 80%
 
69
%
Other assets:
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset, at fair value
 
 
870

 
Discounted cash flows
 
OAS
 
0 - 368 bps
 
55 bps

 
 
 
159

 
Other
 
 
 
 
 
 
Total guarantee asset, at fair value
1,029

 
1,029

 
 
 
 
 
 
 
 
All other, at fair value
 
 
112

 
Discounted cash flows
 
Prepayment rate
 
7.73% -39.87%
 
21.23
%
 
 
 
 
 
 
 
Servicing income per loan
 
0.19% - 0.52%
 
0.25
%
 
 
 
 
 
 
 
Cost to service per loan
 
$78 - $354
 
$
141

 
 
 
2

 
Other
 
 
 
 
 
 
Total all other, at fair value
114

 
114

 
 
 
 
 
 
 
 
Total other assets
1,143

 
1,143

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Other debt, at fair value
 
 
1,188

 
Median of external sources
 
External pricing sources
 
$101.7 - $102.0
 
$
101.7

 
 
 
999

 
Single external source
 
External pricing source
 
$99.9 - $99.9
 
$
99.9

Total other debt recorded at fair value
2,187

 
2,187

 
 
 
 
 
 
 
 
Net derivatives
(479
)
 
47

 
Other
 
 
 
 
 
 
 
(1)
Certain unobservable input types, range, and weighted average data are not disclosed in this table if they are associated with a class: (a) that has a Level 3 fair value measurement that is not considered material; or (b) where we have disclosed the predominant valuation technique with related unobservable inputs for the most significant portion of that class.
(2)
Effective duration is used as a proxy to represent the aggregate impact of key rate durations.
The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs for assets and liabilities measured in our consolidated balance sheets at fair value on a non-recurring basis using unobservable inputs (Level 3) as of December 31, 2013 and 2012.
Table 16.5 — Quantitative Information about Non-Recurring Level 3 Fair Value Measurements
 
 
December 31, 2013
 
Total
Fair
Value
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs(1)
 
Type
 
Range
 
Weighted
Average
 
(dollars in millions)
 
 
 
 
 
 
 
 
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
 
 
 
 
 
 
 
 
 
 
 
Held-for-investment
 
 
$
298

 
Income capitalization
 
Capitalization rates(2)
 
6% - 9%
 
7%
 
 
 
217

 
Third-party appraisal
 
Property value
 
$4 million - $44 million
 
$27 million
Total held-for-investment
$
515

 
515

 
 
 
 
 
 
 
 
REO, net
 
 
1,837

 
Internal model(3)
 
Historical average sales
proceeds per property
by state(4)
 
$17,500 - $318,391
 
$
105,508

Total REO, net
1,837

 
1,837

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
Total
Fair
Value
 
Level  3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs(1)
 
Type
 
Range
 
Weighted
Average
 
(dollars in millions)
 
 
 
 
 
 
 
 
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
 
 
 
 
 
 
 
 
 
 
 
Held-for-investment
 
 
$
711

 
Income capitalization
 
Capitalization rates(2)
 
5% - 9%
 
7%
 
 
 
314

 
Third-party appraisal
 
Property value
 
$2 million - $43 million
 
$21 million
Total held-for-investment
$
1,025

 
1,025

 
 
 
 
 
 
 
 
REO, net
 
 
771

 
Internal model(3)
 
Historical average sales
proceeds per property
by state(4)
 
$32,186 - $356,397
 
$102,697
 
 
 
5

 
Other
 
 
 
 
 
 
Total REO, net
776

 
776

 
 
 
 
 
 
 
 
(1)
Certain unobservable input types, range, and weighted average data are not disclosed in this table if they are associated with a class: (a) that has a Level 3 fair value measurement that is not considered material; or (b) where we have disclosed the predominant valuation technique with related unobservable inputs for the most significant portion of that class.
(2)
The capitalization rate “Range” and “Weighted Average” represent those loans that are valued using the Income Capitalization approach, which is the predominant valuation technique used for this population. Certain loans in this population are valued using other techniques, and the capitalization rate for those is not represented in the “Range” or “Weighted Average” above.
(3)
Represents an internal model that uses actual REO disposition prices for the prior three months, calibrated to the most recent month's disposition prices, 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. This valuation technique is used to measure both the initial value of REO and the subsequent write-down to current fair value.
(4)
Represents the average of three months of REO sales proceeds by state. The national average REO disposition severity ratio for our REO properties was 35.8% and 39.5% for the years ended December 31, 2013 and 2012, respectively.
Fair Value of Financial Instruments
The table below presents the carrying value and estimated fair value of our financial instruments as of December 31, 2013 and 2012.
Table 16.6 — Fair Value of Financial Instruments
 
 
December 31, 2013
 
 
 
Fair Value
 
Carrying  Amount(1)
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments
 
Total
 
(in millions)
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
11,281

 
$
7,360

 
$
3,921

 
$
—

 
$
—

 
$
11,281

Restricted cash and cash equivalents
12,265

 
12,264

 
1

 
—

 
—

 
12,265

Federal funds sold and securities purchased under agreements to resell
62,383

 
—

 
62,383

 
—

 
—

 
62,383

Investments in securities:
 
 
 
 
 
 
 
 
 
 


Available-for-sale, at fair value
128,919

 
—

 
76,770

 
52,149

 
—

 
128,919

Trading, at fair value
23,404

 
6,636

 
16,122

 
646

 
—

 
23,404

Total investments in securities
152,323

 
6,636


92,892


52,795


—

 
152,323

Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans held by consolidated trusts
1,529,905

 
—

 
1,258,049

 
249,693

 
—

 
1,507,742

Unsecuritized mortgage loans
154,885

 
—

 
16,145

 
122,065

 
—

 
138,210

Total mortgage loans(2)
1,684,790

 
—


1,274,194


371,758


—


1,645,952

Derivative assets, net
1,063

 
—

 
14,220

 
11

 
(13,168
)
 
1,063

Guarantee asset
1,611

 
—

 
—

 
1,879

 
—

 
1,879

Total financial assets
$
1,925,716

 
$
26,260


$
1,447,611


$
426,443


$
(13,168
)

$
1,887,146

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
Debt, net:
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties
$
1,433,984

 
$
—

 
$
1,435,894

 
$
1,004

 
$
—

 
$
1,436,898

Other debt
506,767

 
—

 
499,756

 
13,089

 
—

 
512,845

Total debt, net
1,940,751

 
—


1,935,650


14,093


—


1,949,743

Derivative liabilities, net
180

 
—

 
13,291

 
336

 
(13,447
)
 
180

Guarantee obligation
1,522

 
—

 
—

 
3,067

 
—

 
3,067

Total financial liabilities
$
1,942,453

 
$
—


$
1,948,941


$
17,496


$
(13,447
)

$
1,952,990

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
Fair Value
 
Carrying Amount(1)
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments
 
Total
 
(in millions)
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
8,513

 
$
8,513

 
$
—

 
$
—

 
$
—

 
$
8,513

Restricted cash and cash equivalents
14,592

 
14,576

 
16

 
—

 
—

 
14,592

Federal funds sold and securities purchased under agreements to resell
37,563

 
—

 
37,563

 
—

 
—

 
37,563

Investments in securities:
 
 
 
 
 
 
 
 
 
 


Available-for-sale, at fair value
174,896

 
—

 
119,901

 
54,995

 
—

 
174,896

Trading, at fair value
41,492

 
20,221

 
19,681

 
1,590

 
—

 
41,492

Total investments in securities
216,388

 
20,221


139,582


56,585


—

 
216,388

Mortgage loans:
 
 
 
 
 
 
 
 
 
 


Mortgage loans held by consolidated trusts
1,495,932

 
—

 
1,130,438

 
409,722

 
—

 
1,540,160

Unsecuritized mortgage loans
190,415

 
—

 
16,428

 
151,175

 
—

 
167,603

Total mortgage loans
1,686,347

 
—


1,146,866


560,897


—

 
1,707,763

Derivative assets, net
657

 
64

 
24,109

 
20

 
(23,536
)
 
657

Guarantee asset
1,029

 
—

 
—

 
1,325

 
—

 
1,325

Total financial assets
$
1,965,089

 
$
43,374


$
1,348,136


$
618,827


$
(23,536
)
 
$
1,986,801

Financial Liabilities
 
 
 
 
 
 
 
 
 
 


Debt, net:
 
 
 
 
 
 
 
 
 
 


Debt securities of consolidated trusts held by third parties
$
1,419,524

 
$
—

 
$
1,484,228

 
$
2,867

 
$
—

 
$
1,487,095

Other debt
547,518

 
—

 
546,955

 
18,646

 
—

 
565,601

Total debt, net
1,967,042

 
—


2,031,183


21,513


—

 
2,052,696

Derivative liabilities, net
178

 
8

 
31,014

 
67

 
(30,911
)
 
178

Guarantee obligation
1,004

 
—

 
—

 
2,487

 
—

 
2,487

Total financial liabilities
$
1,968,224

 
$
8


$
2,062,197


$
24,067


$
(30,911
)
 
$
2,055,361

(1)
Equals the amount reported on our GAAP consolidated balance sheets.
(2)
The fair value of single-family mortgage loans as of December 31, 2013 includes the effect of a change in estimate related to enhancements implemented to align our economic capital methodology with external capital benchmarks.
Valuation Techniques for Assets and Liabilities Not Measured in Our Consolidated Balance Sheets at Fair Value, but for Which the Fair Value is Disclosed
The following is a description of the valuation techniques we use for items not measured in our consolidated balance sheets at fair value , but for which the fair value is disclosed, the significant inputs used in those techniques (if applicable), and our basis for classifying the measurements as Level 1, Level 2, or Level 3 of the valuation hierarchy. Each technique discussed below may not be used in a given reporting period, depending on the composition of our assets and liabilities measured at fair value and relevant market activity during that period.
Cash and Cash Equivalents (including Restricted Cash and Cash Equivalents)
Cash and cash equivalents (including restricted cash and cash equivalents) largely consist of highly liquid investment securities with an original maturity of three months or less used for cash management purposes, as well as cash held at financial institutions and cash collateral posted by our derivative counterparties. Given that these assets are short-term in nature with limited market value volatility, the carrying amount on our GAAP consolidated balance sheets is deemed to be a reasonable approximation of fair value. Cash and restricted cash are classified as Level 1. Cash equivalents (including restricted cash equivalents) are primarily classified as Level 2 because we use observable inputs other than quoted prices in active markets for identical assets to determine the fair value measurement. However, cash equivalents (including restricted cash equivalents) for which we can obtain quoted prices in active markets for identical assets are classified as Level 1.
Federal Funds Sold and Securities Purchased Under Agreements to Resell
Federal funds sold and securities purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency securities and federal funds sold. Given that these assets are short-term in nature, the carrying amount on our GAAP consolidated balance sheets is deemed to be a reasonable approximation of fair value. Federal funds sold and securities purchased under agreements to resell are classified as Level 2 because these assets have observable market pricing, but quoted prices for identical assets are not available.
Mortgage Loans
Single-family and certain multifamily mortgage loans are classified as held-for-investment and recorded at amortized cost. Other multifamily mortgage loans that are held for investment are recorded at the fair value of the underlying collateral upon impairment. Multifamily held-for-sale mortgage loans are recorded at fair value due to the election of the fair value option.
Single-Family Loans
Determination of Principal Market
In determining the fair value of single-family mortgage loans, valuation outcomes can vary widely based on management judgments and decisions used in determining: (a) the principal market; (b) modeling assumptions, including default, severity, home prices, and risk premiums; and (c) inputs used to determine variables including risk premiums, credit costs, security pricing, and implied management and guarantee fees. Our principal markets include the GSE securitization market and the whole loan market. To determine the principal market, we considered the market with the greatest volume and level of activity and our ability to access that market. In the absence of a market with active trading, we determined the market that would maximize the amount we would receive upon sale. We determined that the principal market is the whole loan market for loans that: (a) are four or more months delinquent; (b) are in foreclosure; (c) have completed a HAMP loan modification; (d) have completed a non-HAMP loan modification but have not been current for at least 12 consecutive months; or (e) have been modified through a process that included forbearance on a portion of the outstanding balance. The total UPB of loans where the whole loan market is the principal market was approximately $101.2 billion and $110.0 billion as of December 31, 2013 and 2012, respectively. We determined that the principal market for all other loans, regardless of whether the loan is currently securitized or whether the loan is eligible for purchase under current underwriting standards, is the GSE securitization market. The total UPB of loans where the GSE securitization market is the principal market was approximately $1.5 trillion as of both December 31, 2013 and 2012.
Whole Loan Market as Principal Market
Loans where we determine that the principal market is the whole loan market are valued using the median of external sources. Under the median of external sources technique, prices for single-family loans are obtained from multiple dealers. These dealers reference market activity for deeply delinquent and modified loans, where available, and use internal models and their judgment to determine default rates, severity rates, home prices, and risk premiums. Single-family mortgage loans valued using this technique are classified as Level 3 due to the low volume and level of activity in this market.
GSE Securitization Market as Principal Market
Loans where we determine that the principal market is the GSE securitization market are valued using the build-up technique. Under the build-up technique, the fair value of single-family mortgage loans is based on the estimate of the price we would receive if we were to securitize the loans. These loans are valued by starting with benchmark security pricing for actively traded mortgage-related securities with similar characteristics; adding in the value of our management and guarantee fee, which is the compensation we receive for performing our management and guarantee activities; and subtracting the value of the credit obligation related to performing our guarantee.
The security price is based on benchmark security pricing for similar actively traded mortgage-related securities, adjusted as necessary based on security characteristics. This security pricing process is consistent with our approach for valuing similar securities retained in our investment portfolio or issued as debt to third parties. See “Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance Sheets at Fair Value — Investments in Securities.”
The management and guarantee fee is valued by estimating the present value of the additional cash flows related to our management and guarantee fee. The management and guarantee fees for the majority of our loans are valued using third-party dealer prices on hypothetical interest-only securities based on collateral characteristics from our single-family credit guarantee portfolio. For loans where third-party market data is not readily available, we use a discounted cash flow approach, leveraging the dealer prices received for the majority of our loans and including only those cash flows related to our management and guarantee fee.
The credit obligation related to performing our guarantee is valued by estimating the fair value of the related credit and other costs (such as general and administrative expenses) and benefits (such as credit enhancements) inherent in our guarantee obligation. For loans that qualify for purchase under current underwriting standards, we use the delivery and guarantee fees that we charge under our current market pricing as a market observation. For loans that do not qualify for purchase based on current underwriting standards, we use our internal credit models, which incorporate factors such as loan characteristics, loan performance status information, expected losses, and risk premiums.
Single-family mortgage loans that qualify for purchase under current underwriting standards are classified as Level 2 as the significant inputs used for the valuation of these loans, such as security pricing, our externally published credit pricing matrices, and third-party prices used in valuing the management and guarantee fee, are observable, while the unobservable inputs, such as general and administrative expenses and credit enhancements, are not significant to the fair value measurement. Single-family mortgage loans that do not qualify for purchase under current underwriting standards are classified as Level 3 as the credit cost is based on our internal credit models which use unobservable inputs that are significant to the fair value measurement.
HARP Loans
For loans that have been refinanced under HARP, we value our guarantee obligation using the delivery and guarantee fees currently charged by us under that initiative. HARP loans valued using this technique are classified as Level 2, as the fees charged by us are observable. If, subsequent to delivery, the refinanced loan no longer qualifies for purchase based on current underwriting standards (such as becoming past due or being modified), the fair value of the guarantee obligation is then measured using: (a) our internal credit models; or (b) the median of external sources, if the loan’s principal market has changed to the whole loan market. HARP loans valued using either of these techniques are classified as Level 3 as significant inputs are unobservable. The majority of our HARP loans are classified as Level 2.
The total compensation that we receive for the delivery of a HARP loan reflects the pricing that we are willing to offer because HARP is a part of a broader government program intended to provide assistance to homeowners and prevent foreclosures. When HARP ends (currently scheduled for December 31, 2015), the beneficial pricing afforded to HARP loans will no longer be reflected in our delivery and guarantee fee pricing structure. If these benefits were not reflected in the pricing for these loans, the fair value of our mortgage loans would have decreased by $18.5 billion and $11.2 billion as of December 31, 2013 and 2012, respectively. The total fair value of the loans in our portfolio that reflects the pricing afforded to HARP loans as of December 31, 2013 and 2012 as presented in our consolidated fair value balance sheets is $145.0 billion and $153.1 billion, respectively.
Multifamily Loans
For a discussion of the techniques used to determine the fair value of held-for-sale and impaired held-for-investment multifamily mortgage loans, see “Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance Sheets at Fair Value — Mortgage Loans, Held-for-Sale” and “— Mortgage Loans, Held-for-Investment,” respectively. Non-impaired multifamily mortgage loans 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'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. These loans are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Total Debt, Net
Total debt, net represents debt securities of consolidated trusts held by third parties and other debt that we issued to finance our assets. On our consolidated GAAP balance sheets, total debt, net, excluding debt securities for which the fair value option has been elected, is reported at amortized cost, which is net of deferred items, including premiums, discounts, and hedging-related basis adjustments.
For debt securities of consolidated trusts, the valuation techniques we use are similar to the techniques we use to value our investments in agency securities for GAAP purposes. See “Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance Sheets at Fair Value — Investments in Securities — Mortgage-Related Securities — Agency Securities” for additional information regarding the valuation techniques we use.
Other debt includes short-term zero-coupon discount notes, callable debt, and non-callable debt. Short-term zero-coupon discount notes are valued using a yield analysis technique. Under this technique, the debt instruments are valued using published yield matrices which are based on the days to maturity of the debt and converted into a price. Significant inputs used in this technique are the published yield matrices. Short-term zero-coupon discount notes are classified as Level 2 as the significant inputs used are observable in active markets. Other debt securities, including both callable and non-callable debt, are valued using a single external source or median of external sources. These debt securities generally have observable market pricing and are classified as Level 2. However, certain other debt securities are classified as Level 3 when there is a low volume or level of activity in the market for those types of debt securities.
Total debt, net for which we have elected the fair value option includes certain debt securities of consolidated trusts held by third parties and certain other debt. We report these items at fair value on our GAAP consolidated balance sheets. See “Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance Sheets at Fair Value — Debt Securities of Consolidated Trusts Held by Third Parties, at Fair Value” and “— Other Debt, at Fair Value” for additional information.
Guarantee Obligation
Our guarantee obligation is classified as Level 3 as significant inputs used in the fair value measurement are unobservable. The technique for estimating the fair value of our guarantee obligation is described in the “Mortgage Loans — Single-Family Loans” section above.
Fair Value Option
We elected the fair value option for certain types of investments in securities, multifamily held-for-sale mortgage loans, and certain debt.
Investments in Securities
We elected the fair value option for certain mortgage-related securities to better reflect the natural offset these securities provide to fair value changes recorded historically on our guarantee asset at the time of our election. In addition, upon adoption of the accounting guidance for the fair value option, we elected this option for securities within the scope of the accounting guidance for investments in beneficial interests in securitized financial assets to better reflect any valuation changes that would occur subsequent to impairment write-downs previously recorded on these instruments. Related interest income continues to be reported as interest income in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” for additional information about the measurement and recognition of interest income on investments in securities. For information regarding the net unrealized gains (losses) on trading securities, which include gains (losses) for other items that are not selected for the fair value option, see Gains (loss) on trading securities within “Table 13.2 — Segment Earnings and Reconciliation to GAAP Results."
Multifamily Held-For-Sale Mortgage Loans
We elected the fair value option for multifamily mortgage loans that were purchased for securitization. These multifamily mortgage loans are classified as held-for-sale mortgage loans in our consolidated balance sheets to reflect our intent to sell in the future. Related interest income continues to be reported as interest income in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Mortgage Loans” for additional information about the measurement and recognition of interest income on our mortgage loans.
Debt Securities of Consolidated Trusts Held by Third Parties
We elected the fair value option for certain debt securities of consolidated trusts held by third parties. These consist of certain multifamily K Certificates where we are in a first loss position and certain REMIC interest-only mortgage-related debt securities. We elected the fair value option on these debt instruments as they contain embedded derivatives that require bifurcation. Fair value changes for debt securities of consolidated trusts held by third parties are recorded in other income in our consolidated statements of comprehensive income. Related interest expense continues to be reported as interest expense in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Debt Securities Issued” for additional information about the measurement and recognition of interest expense on debt securities issued.
Other Debt
We elected the fair value option on: (a) STACR debt notes; (b) extendible variable-rate notes containing quarterly options for investors to extend the maturity of the notes; and (c) foreign-currency denominated debt. We elected the fair value option for STACR debt notes and extendible variable-rate notes as they contain potential embedded derivatives requiring bifurcation. In the case of foreign-currency denominated debt, we entered into derivative transactions that effectively converted these instruments to U.S. dollar denominated floating rate instruments. We elected the fair value option on these debt instruments to better reflect the economic offset that naturally results from the debt due to changes in interest rates. Fair value changes for debt for which we have elected the fair value option are recorded in other income in our consolidated statements of comprehensive income. Related interest expense continues to be reported as interest expense in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Debt Securities Issued” for additional information about the measurement and recognition of interest expense on debt securities issued.
The table below presents the fair value and UPB related to certain items for which we have elected the fair value option at December 31, 2013 and 2012.
Table 16.7 — Difference between Fair Value and Unpaid Principal Balance for Certain Financial Instruments with Fair Value Option Elected
 
 
December 31,
 
2013
 
2012
 
Multifamily
Held-For-Sale
Mortgage Loans
 
Other Debt -
Long Term
 
Multifamily
Held-For-Sale
Mortgage Loans
 
Other Debt -
Long Term
 
(in millions)
Fair value
$
8,727

 
$
2,683

 
$
14,238

 
$
2,187

Unpaid principal balance
8,721

 
2,635

 
13,972

 
2,167

Difference
$
6

 
$
48

 
$
266

 
$
20

Changes in Fair Value under the Fair Value Option Election
We recorded gains (losses) of $(0.3) billion, $1.0 billion and $0.8 billion for the years ended December 31, 2013, 2012, and 2011, respectively, from the change in fair value on multifamily held-for-sale mortgage loans recorded at fair value in other income in our consolidated statements of comprehensive income.
Gains (losses) on debt securities with the fair value option elected were $(37) million, $16 million, and $91 million for the years ended December 31, 2013, 2012, and 2011, respectively, and were recorded in other income in our consolidated statements of comprehensive income.
Changes in fair value attributable to instrument-specific credit risk were not material for the years ended December 31, 2013, 2012, or 2011 for any assets or liabilities for which we elected the fair value option.

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