Four major banking associations all urged the Financial Accounting Standards Board to abandon a requirement that would measure impairments of mortgage servicing portfolios on a stratum-by-stratum basis.
It was just about the only issue that the groups agreed on. Among the other points made, the Mortgage Bankers Association wanted to narrow the scope of FASBs project, the Savings & Community Bankers of America questioned aspects involving securitization, the American Bankers Association wanted a longer time frame for the sales period involved and the Independent Bankers Association of America wanted to exempt most of its members from the proposals effects.
All were commenting on FASBs exposure draft Accounting for Mortgage Servicing Rights and Excess Servicing Receivables and for Securitization of Mortgage Loans. The draft was designed largely to enable bankers who originate their mortgages to capitalize their investment in servicing, just as banks that purchase servicing rights now get to do.
Except for the IBAA, which considered the proposal more trouble than it was worth, all the groups endorsed the drafts general intentionsexcept for the section on stratification.
The MBA said that booking impairments to valuation allowance accounts for each strata in an institutions mortgage servicing portfolio would be trouble to administer and would distort the values of portfolios.
The MBA added: We would like to emphasize that a major objective of the Boards mortgage servicing project has been to curb transfers of servicing rights for accounting reasons. If, however, the Board requires portfolios to be evaluated by strata, mortgage companies will be motivated to sell those strata that are undervalued (i.e. have fair values above their carrying values) for financial reporting purposes. This form of cherry-picking will undoubtedly become commonplace as mortgage bankers begin to understand the effects of the new standard on their operating results. The association urged the Board to require that portfolios be evaluated on a net aggregate Lower of Cost or Market Basis.
We think that it ought to be on an aggregated basis rather than on strata, said Donna Fisher, the ABAs accounting expert. We think [the emphasis] ought to be more on how you manage and how you track it.
What differences the groups did display tended to reflect worries specific to one group. Among them:
SCBA questioned the notion in the exposure draft that any securitization of mortgage loans must be accounted for as the sale of a loan and the acquisition of a mortgage-backed security. SCBA argued that securitization changes the form of an asset but not its ownership rights. Since a transfer of ownership has not occurred, securitization is not a reportable transaction, SCBA said. The ABA agreed.
IBAA wants out. The bottom line for us is that for institutions that have only small amounts of servicing rights, the proposal will impose substantial additional accounting requirements that wont have much long-term value, said Ann Grochala, IBAAs accounting expert. Theyll have to add staff or increase their auditing and accounting expenses.
As of press time, Grochala said the IBAA had yet to settle on which standard it would suggest as the threshold below which banks shouldnt be required to follow the standards.
The MBA said FASB should avoid applying its proposed statement to servicing on commercial, multifamily and home equity mortgages. Those types are extremely complicated and arent traded much, it said. The group recommended the board limit its proposed statement to residential mortgage servicing.
SCBA disliked FASBs call to determine the relative fair value of mortgage servicing rights and mortgage loans at a) the date of acquisition when a definitive plan is in place for selling the loans or b) the sale date if there isnt any commitment or plan to sell. This might not be practicable, SCBA said.
The MBA backed FASBs language, for the most part but wants FASB to say a plan is has a sale date thats usually not more than 30 days.