Accounting change on originations may prove to be a mixed blessing.

Possible changes in accounting for originated mortgage servicing rights, heralded earlier as a boon to publicly held mortgage companies, may instead prove to be a mixed blessing.

Bruce Schnelwar, chief financial officer of Margaretten & Co., Perth Amboy, N.J., said he expected reported earnings figures to become more volatile. "But they will represent a truer picture of earnings," he said.

Mr. Schnelwar was a member of a panel on the possible rule changes by the Financial Accounting Standards Board at a seminar in New York sponsored by Baltimore-based Alex. Brown & Sons.

At present, servicing rights do not appear on the balance sheet of the originator even when the originator sells the loan itself in the secondary market.

Earnings Understated

But purchased servicing rights do appear as assets. This means that the earnings of mortgage banking companies are understated because they do not include the present value of the servicing rights already in hand.

The change being considered by the board would immediately increase reported earnings of mortgage banks. But it would also eliminate much of the steady stream of earnings from servicing that in the past had offset fluctuations in origination income. In turn, this could make earnings more volatile.

Sy Jacobs, an analyst with Alex. Brown, said, "Earnings would be less predictable, but at much higher levels." He also said companies would be free to hold on to servicing rights rather than selling them to book earnings. "The good news is, servicing portfolios would grow."

Issues Could Prove Sticky

The accounting standards board agreed in October to take up a limited-scope project to draft new rules that would treat all servicing rights equally regardless of origin.

The "limited scope" means that the board will try to complete its work in about a year instead of taking a few years as with other projects, according to another panelist, Anne McCallion, a senior vice president at Countrywide Credit Industries, Pasadena, Calif

Despite the short-term nature of the project, some of the issues could prove to be sticky, the panelists said.

A new rule would also have to address allocation of costs to originations and servicing, and amortization schedules would have to be determined. The board would also need to determine a method for valuing servicing rights, and there are boosters for using fair market value and for using discounted cash flow.

"If it goes to fair market value, then it must take into account the duration of the servicing," said Mr. Schnelwar. "FASB may decide to put an artificial value on the amount you can capitalize, maybe by saying you can't exceed the value of the future cash flows."

Sy Jacobs cautioned his audience of institutional investors that a change in the rule "is not a primary issue" in deciding whether to invest in mortgage banking stocks.

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