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MBS market reacts positively to FASB decision

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At its June 29, 2005 meeting, the Financial Accounting Standards Board decided that it would not provide additional guidance on the meaning of “other-than-temporary impairment,” a decision welcomed by MBS market participants.

As an alternative, the Board will issue as final proposed FSP EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1.” The proposal, retitled FSP FAS 115-1, will be effective in periods beginning after Sept. 15. FASB will issue the finalized FSP sometime this month.

This ruling is generally seen as a positive for the MBS sector. Deutsche Bank Securities analysts hailed the ruling, saying that it “is a victory for investors and a positive for the MBS market, because EITF 03-1 would have forced financial institutions to charge unrealized losses on rate-impaired securities to their earnings.” Meanwhile, Credit Suisse First Boston analysts think that holders of MBS and other fixed-income securities will probably return to the treatment of AFS securities before the ruling entered the spotlight last year. JPMorgan Securities also expects regional banks to become more active in MBS than they have been in the past year, particularly in the 15-year sector, which they tend to favor.

Still, it would seem that this issue is not exactly over based on comments included in the Board minutes from the meeting. According to the Board minutes, members agreed that the available-for-sale designation should still be addressed. One of the Board members stated that the separate classifications – trading, HTM and AFS – are causing repeated difficulties in implementation and interpretation, emphasizing the pressing need to eliminate the available-for-sale classification.

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