Last week, the U.S. House Financial Services Subcommittee members turned up the pressure on accounting regulators to do something about the fair value rules, which so many have blamed for a large part of the financial meltdown. Compliance Week reports that the Financial Accounting Standards Board met Monday to begin hammering out guidance on defining inactive markets and how to properly account for fair value in those markets.
A Mortgage Backed Security dissappears once all the underlying collateral (home mortgages) have been refinanced/paid-off or sold out of foreclosure. At this point in time, the owner of the MBS will have received all of the principle and accrued interest for the security he hold.
After the Fed's statement today, all of the mortgages in MBS are going to be replaced by good 4% mortgages sponsored by yes, yes.....the taxpayer.
The problem arises when the company and its auditors need to answer the question: Will this asset be sold by the holder prior to its maturity. Not a problem if an instituion holds individual loans which they will hold until maturity, payoff or refinance. But still a problem when a mortgage-backed or asset backed security is owned: what is maturity?
On April 2nd FASB is scheduled to vote on changes to the "mark to market" rule. As I understand it, as it relates to RMBS holdings, firms will not be required to write-down an illiquid asset to a 'bid' price where there has been no activity, but rather maintain a "good judgement value" until the asset is actually sold. In short, there is going to be some judgement exercised by auditors in viewing values assigned to an asset that there is no market for.
This raises an interesting question: If three companies each owned 1MM shares of IBM on 03/31/09, each company would show the same value for that asset in their 10Q. However under the proposed MTM guidelines if three banks each held identical mortgage-backed securities on 3/31/09, they could each show a different valuation based on the conservatism of the auditor.