FASB's Proposed OTTI Rule Changes Could Aid MBS Holders

The Financial Accounting Standards Board has proposed changes to its "other-than-temporary impairment" rules that should relieve many institutions from taking sharp losses on their holdings of mortgage-backed securities. For debt securities institutions are holding and do not expect to sell, only credit losses would be reported in earnings and the remainder of the impairment would be reported in "other comprehensive income," according to newly proposed OTTI guidance. "The new guidance makes it clear that effects on income are limited to actual credit losses. Notice that the new FASB guidance on OTTI accounting has little effect on capital," according to credit strategists at Bank of America/Merrill Lynch. Currently, FASB has a tougher ability-to-hold standard and the entire estimated impairment is reported as a loss. The comment period on the FASB guidance ends April 1. FASB also is seeking comment on changes to its fair value rules for determining distressed and inactive markets.