NCUA: Mortgage Sales Amount To Derivatives

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NCUA told credit unions last week that commitments to sell mortgages on the secondary market amount to derivatives under generally accepted accounting principles, so must be accounted for at fair market value on a credit union's financial statements.

In a new accounting bulletin, issued with the banking regulators, NCUA also noted that interest rate lock commitments with members on loans originated for resale should also be considered as derivatives and reported at market value. The definition of a derivative loan commitment is when a lender agrees to make a loan under certain specified conditions, such as locking in a rate, prior to funding, regardless of whether market rates change.

Market value accounting is also required for forward loan sales commitments, mandatory delivery contracts and best efforts contracts to resell mortgages on the secondary market, the regulators explained.

The accounting guidance, stated NCUA, does not apply to the majority of credit unions that simply originate mortgage loans to members and hold them in portfolio. But those credit unions that originate mortgages with an intent to resell and/or enter into commitments to sell the loans should apply the guidance to their regulatory filings, their 5300 call reports.

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