Abstract
In an effort to alleviate the poor liquidity and profitability positions of S&Ls, the FHLBB eased its statutory net worth requirements by allowing the deferral of losses on the sale of old loans. This study examines the reaction of S&Ls to this accounting reporting change and the subsequent effect on the market price of mortgage-backed securities traded by S&Ls. The paper indicates that in reaction to the reporting change, prices in the GNMA market were affected, with low-coupon GNMAs declining in price relative to high-coupon GNMAs. This phenomenon is consistent with the (relative) increase in the supply of low-coupon GNMAs that were offered for sale by the S&Ls as a result of the change in reporting requirements.
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