The Office of Federal Housing Enterprise Oversight has issued examination guidance regarding Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.”

The guidance outlines standards for OFHEO examiners to apply when overseeing and evaluating the use of the fair value option already adopted by Fannie Mae and Freddie Mac. It sets forth OFHEO’s expectations for practices that will promote sound risk management and controls, support the integrity of regulatory capital measures, and foster transparent and consistent financial reports by the enterprises.

In addition, the guidance provides that OFHEO may require supplemental information for use in assessing how enterprises are using the fair value option and the impact on their reporting of financial conditions.

“It is important that Fannie Mae and Freddie Mac apply fair value in a sound and consistent manner,” said OFHEO Director James B. Lockhart in a statement. “Although Fannie Mae and Freddie Mac are using fair value for only a portion of their assets and liabilities, the use of fair value should help dampen fluctuations in earnings caused by their large derivative portfolios. Also, OFHEO expects the enterprises to continue to publish quarterly full fair value balance sheets.”

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