Fair value accounting for securities, whether in the income statement or in disclosures, relies on key assumptions, modeling techniques and judgment. For example, modeling techniques are commonly used in valuing mortgage-backed securities. The present value of the estimated future net cash flows attempts to anticipate prepayments of mortgages due to forecasted changes in interest rates.
Changes in the assumptions used in the modeling approach for any instrument or product will affect the resulting values. For example, if property values are rising rather than falling, the resulting buildup of home equity can affect a borrower’s desire to refinance the loan or use the equity to purchase a more expensive home.