New guidance was published Monday by the Office of Federal Housing Enterprise Oversight on an accounting standard used to determine procudures and protocol for so-called fair-value accounting methods. The standard in question, FASB 159, is a companion to FASB 157; both standards govern the election to carry almost any financial instrument at “fair value.” Housing Wire contributor Linda Lowell wrote a detailed piece on FASB 157 last week, for those who missed it; it’s important reading in light of OFHEO’s new guidance. That OFHEO would choose right now to issue guidance on FASB 159 — ahead of each GSE’s first quarter earnings report, and after the full effective date last November — rose more than a few eyebrows among sources Housing Wire spoke with. “It reads like a warning,” said one source, who asked not to be named. “There isn’t anything in the guidance that makes you say wow, this is really new,” said another source, on condition of anonymity. “So the question becomes whether OFHEO has some reason for concern.” From the published guidance on use of the fair-value option, or FVO:

… if an Enterprise elects the FVO for its own debt and its creditworthiness deteriorates, it will recognize a gain in earnings and an increase in the statutory measure of core capital. In such a circumstance, OFHEO will take into consideration this contrary or inappropriate adjustment to core capital in assessing capital adequacy. Further, if OFHEO detects patterns of use of the fair value option that impair transparency or distort earnings or capital, OFHEO will evaluate whether such application of the FVO is unsafe and unsound. OFHEO may take action to respond to an Enterprise’s use of the fair value option in situations where risk management or controls are deficient or when it raises other safety and soundness issues, even if the option is complies with the accounting standard.

“It is important that Fannie Mae and Freddie Mac apply fair value in a sound and consistent manner,” said OFHEO Director James B. Lockhart. “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,” he said. Purely on a speculative basis, we have to think that Lockhart and OFHEO examiners have some degree of concern that “dampening fluctuations in earnings” could turn into “earnings management” — a road that probably feels all too familiar.