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Mixed Reviews on Mark-To-Market Guidance

Mixed Reviews on Mark-To-Market GuidanceTrade groups see good, bad in SEC, FASB guidance

October 1, 2008

By staff

Guidance on mark-to-market won’t have much of a positive impact, according to one mortgage group. But bankers and mortgage bankers cheered the clarification.

The guidance provided yesterday by the Securities and Exchange Commission and the Financial Accounting Standards Board offers little help for the fair value accounting issue, according to a statement from the Consumer Mortgage Coalition.

“Unfortunately, the change made yesterday by the SEC will have little positive impact.” the trade group’s Executive Director Anne Canfield said in an e-mail statement.

The coalition, which is calling for a suspension of mark-to-market accounting, noted another option would have policymakers considering cash-flow estimates as a basis for defining the discount rate for companies and market participants.

Instead of the current understood 15 to 20 percent un-leveraged return, SEC and legislative policymakers could define the discount rate at 7 percent — a level closer to what an investor might require in a more liquid environment.

In yesterday’s clarification, the SEC indicated that management’s internal assumptions can be used in determining fair value when an active market for a security does not exist. But expectations of future cash flows and appropriate risk premiums must be included.

The guidance also discussed the unreliability of distressed or forced liquidation sales, using broker quotes primarily in liquid markets, and wide spreads between bid and ask prices. Other-than-temporary temporary impairment determinations need to be transparent to investors.

“While perhaps well-intended, upon review, it seems clear that the SEC clarification issued yesterday does not represent any change in fair value,” Canfield, an occasional contributor to news, said.

The Mortgage Bankers Association, however, today commended the SEC for permitting the use of discounted cash flow fair value measurements under FAS 157 when no active market for a security exists.

“FAS 157 was never test driven in a market where the only transactions occurring are distressed sales,” MBA Chief Operating Officer John A. Courson said in an announcement. “In such an environment, FAS 157 was only exacerbating the market illiquidity.

“This announcement should have an immediate impact allowing companies to reflect the true value of their mortgage assets and increasing capital and liquidity in today’s stalled credit markets.”

MBA noted many financial institutions have been marking down credit instrument holdings to values derived from distressed sales. The SEC’s clarification will enable asset valuations based on a realistic calculation of the present value of future cash flows.

The American Bankers Association also lauded the move.

“More and more of our members in recent weeks have raised concerns that a number of accounting firms were mistakenly interpreting SFAS 157 in a way that required marking assets to fire sale values,” the banking group’s President and CEO Edward L. Yingling said in its own statement yesterday. “This guidance will help auditors more accurately price assets that are difficult to value under current market conditions.”

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