Exposure draft under fire; changes sought to FAS 65's stratified, transition approaches.

Mortgage bankers were disappointed the Financial Accounting Standards Board refused to change its position on certain provisions of its FAS 65 exposure draft. Undaunted, they plan to intensify the pressure on the board in hopes of sparking a change of heart. FASB released its long-awaited exposure draft, an amendment to Financial Accounting Statement No. 65, Accounting for Certain Mortgage Servicing Rights and Excess Receivables and Securitization of Mortgage Loans, June 28, and set a Sept. 30 comment deadline. The draft affects the recognition and measurement of mortgage servicing rights and the securitization of mortgage loans. And although the draft has been generally accepted by many lenders who have worked with FASB in its developmentincluding the Mortgage Bankers Associationlenders continue to express concern over both the impairment and transition provisions. Under the stratified approach, a lenders portfolio would be required to be rearranged by its risk characteristics, then be evaluated by individual stratum. If a write-down is indicated for part of the strata, a reserve would have to be established. Mortgage bankers dont manage their portfolios by strata, said Alison Utermohlen, MBA senior manager, financial management. The economic value of the entire portfolio should be considered as a whole. The MBA plans to offer the board an alternative that would require once a portfolio is stratified and the cash flow for each stratum calculated, the value for the strata would be added to evaluate whether it should be recognized as an impairment loss. But the stratified approach isnt the only provision to draw fire, the rules transition approach is also an issue. Mortgage bankers said they are concerned the guidance for evaluating servicing rights for impairment will be applicable to all on-balance sheet servicing immediately. That would mean if, for example, a company has a significant portion of servicing from 1988, it would be subject to the impairment rule, even though it occurred before the rule was established. Modifications to the exposure draft are possible, but, as written, the draft would: Require an entity allocate the cost of mortgage loans between the mortgage servicing rights and the loans without the MSRs based on their relative fair values if it sells the loans and retains the related servicing rights. It also requires an entity allocate the cost of mortgage loans between the mortgage servicing rights and the loans without MSRs based on their relative fair value at the date of acquisition if it has a definitive plan to sell the loans and retain the servicing rights. In the absence of a definitive plan, the entity would be required to allocate the cost of the loans based on their fair values at the date of the sale. Require all securitizations of mortgage loans be accounted for as sales of mortgage loans and acquisitions of mortgage-backed securities; Require capitalized excess servicing rights and capitalized excess servicing receivables be assessed for impairment. In addition, it would require that an entity measure impairment based on fair value; For purposes of evaluating and measuring impairment of capitalized mortgage servicing rights and capitalized mortgage servicing receivables, require an entity to stratify those assets based on the risk characteristics of the underlying loans. It would require that an entity recognize impairment through a valuation allowance for each impaired stratum with a corresponding charge to expense; and Apply prospectively to transactions in which an entity acquires MSRs and to impairment evaluations of all capitalized MSRs and capitalized excess servicing receivables. Retroactive application would be prohibited. The MBA and the Savings & Community Bankers of America said their members will be field testing the amendments to FAS 65. Volunteers are typically solicited by FASB to test the practicality of its proposals, as well as determine costs and analyze the assumptions used to determine those costs.