Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]

Fair Value Disclosures [Text Block]

Fair Value Measurements

We determine the fair value of our agency securities and debt of consolidated VIEs based upon fair value estimates obtained from multiple third party pricing services and dealers.  In determining fair value, third party pricing sources use various valuation approaches, including market and income approaches.  Factors used by third party sources in estimating the fair value of an instrument may include observable inputs such as coupons, primary and secondary mortgage rates, pricing information, credit data, volatility statistics, and other market data that are current as of the measurement date. The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument.  Third party pricing sources may also use certain unobservable inputs, such as assumptions of future levels of prepayment, defaults and foreclosures, especially when estimating fair values for securities with lower levels of recent trading activity. We make inquiries of third party pricing sources to understand the significant inputs and assumptions they used to determine their prices. For further information regarding valuation of our derivative instruments, please refer to the discussion of derivative and other hedging instruments in Note 2.

We review the various third party fair value estimates and perform procedures to validate their reasonableness, including an analysis of the range of third party estimates for each position, comparison to recent trade activity for similar securities, and management review for consistency with market conditions observed as of the measurement date. While we do not adjust prices we obtain from third party pricing sources, we will exclude third party prices for securities from our determination of fair value if we determine (based on our validation procedures and our market knowledge and expertise) that the price is significantly different than observable market data would indicate and we cannot obtain an understanding from the third party source as to the significant inputs used to determine the price.

The validation procedures described above also influence our determination of the appropriate fair value measurement classification.  We utilize a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument's categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There were no transfers between hierarchy levels during fiscal year2012 and 2011. The three levels of hierarchy are defined as follows:

• Level 1 Inputs —Quoted prices (unadjusted) for identical unrestricted assets and liabilities in active markets that are accessible at the measurement date.

• Level 2 Inputs —Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

• Level 3 Inputs —Instruments with primarily unobservable market data that cannot be corroborated.

The following table provides a summary of our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2012 and 2011 (dollars in millions):

	Fair Value Hierarchy
	Level 1		Level 2		Level 3
December 31, 2012
Assets:
Agency securities	$	—	$	85,245	$	—
Interest rate swaps	—		14		—
Payer swaptions	—		171		—
Other derivative instruments	—		116		—
Total	$	—	$	85,546	$	—
Liabilities:
Debt of consolidated VIEs	$	—	$	937	$	—
Obligation to return U.S. Treasury securities borrowed under reverse repurchase agreements	11,763		—		—
Interest rate swaps	—		1,243		—
Other derivative instruments	—		21		—
Total	$	11,763	$	2,201	$	—
December 31, 2011
Assets:
Agency securities	$	—	$	54,683	$	—
U.S. Treasury securities	101		—		—
Interest rate swaps	—		13		—
Other derivative instruments	—		69		—
Total	$	101	$	54,765	$	—
Liabilities:
Debt of consolidated VIEs (1)	$	—	$	54	$	—
Obligation to return U.S. Treasury securities borrowed under reverse repurchase agreements	899		—		—
U.S. Treasury futures	14		—		—
Interest rate swaps	—		795		—
Other derivative instruments	—		44		—
Total	$	913	$	893	$	—

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1. This amount is recorded at cost basis which closely approximates its fair value.