The accounting profession and the nation's banks and thrifts are grappling over a proposed rule that could drastically affect the way institutions manage their mortgage investments.

Lenders often securitize the mortgages in their portfolios and retain the guaranteed securities for investment or other purposes, including collateral for short-term financings known as repurchase agreements.

Often, the repos, as they are called, provide temporary financing for other mortgages that have been closed but not yet delivered to investors. Repos also serve as a tool in risk management.

Technically, a repo is an agreement to sell mortgage securities, then repurchase them on a specific nearby date. So they are a kind of hybrid, in theory not exactly a loan but not exactly a sale and purchase either.

Such ambiguity does not sit well with the rulemakers, and the proposal now before the Financial Accounting Standards Board would require lenders to classify repos that mature in more than 90 days as a sale and a purchase, recognizing profit or loss from each transaction on their income statements. Shorter agreements would still qualify collateralized loans.

The rule would also mean that securities targeted for future use in repo deals would have to be classified as held for sale rather than for investment. And this means that the attached servicing rights would be subject to impairment charges if their value declines.

But who needs more earnings volatility? The portfolio lenders certainly don't, and they let the board know all about it at a hearing on Tuesday.

Yet, as some see it, earnings volatility is only the tip of the iceberg when it comes to problems with the proposed rule. Representatives of America's Community Bankers, testifying at the hearing, said almost all its members - thrift institutions across the country - use repurchase agreements, and about 45% of the deals are for longer than the three-month threshold targeted by the proposed rule.

In a comment letter to FASB, Marti Sworobuk, a government relations executive for the trade group, said the proposed rule could:

*Alter the market for mortgage-backed securities as they are typically used for repo collateral along with Treasury securities.

*Force insured depository institutions to take on more interest rate risk.

*Block access to medium-term funding for institutions not rated by credit agencies.

*Impair profitability by reducing flexibility to acquire funding at advantageous rates.

So the nation's thrifts, looking at an accounting change that seems highly technical to an outsider, see potential disaster. Whether FASB ultimately agrees remains to be seen.

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