The GSEs and the Revised Accounting Standards

February 26, 2010

The analysis of the changes in the GSEs' delinquent loan buyout policies focused on their impact on prepayment speeds and coupon swaps. An underlying notion was that the implementation of FAS 166 and 167 by Fannie Mae and Freddie Mac, which took place effective at the beginning of 2010, paved the way for the announcement; since the loans are now carried on their books at fair value, buyouts no longer have any affect on the GSEs' income statements. However, adopting the new accounting rules required the consolidation of massive amounts of MBS trust assets and liabilities onto the GSEs' balance sheets. The consolidation will in turn have a significant impact on their financial statements, and arguably was a significant factor in the Treasury's Dec. 24 announcement of unlimited support for the GSEs. Along with the prospect of continued operating losses, these changes will eventually impact the upcoming debates on housing, the federal budget and the future of the GSEs.

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