Two years ago, many people in the mortgage business were excited about the prospective benefits of a quick revision in a key accounting rule. At the time, the industry was coming off a record year and embarking on an even bigger boom that would carry mortgage originations above $1 trillion.
An assortment of side issues, however, delayed the revision of the accounting rule. And in the meantime, the boom turned into a slump as interest rates climbed and mortgage originations fell off a cliff.
Now, the accounting revision is back on the fast track. "We're likely to see a final rule in early April," said Marti Sworobuk, program manager for financial accounting and management at America's Community Bankers, the trade group formerly known as the Savings and Community Bankers of America.
But the population of mortgage companies, which will be able to report increased earnings under the new treatment, has shrunk sharply and diluted the benefits of the change.
The major thrust of the revision of FAS 65 is to make all servicing rights equal in the eyes of the accounting profession. Servicing rights are the right to collect fees for gathering and processing monthly mortgage payments, and they are the backbone of mortgage banking.
Previously, if a company bought servicing rights, the rights appeared on the books as an asset. But if the rights were acquired in making a loan, they did not appear on the books.
The revised rule gives equal treatment to all servicing rights, unless the underlying loan is held for investment by the lender, with no intention of sale.
For anyone with a large portfolio of originated servicing rights, this means an immediate increase in reported earnings.
The biggest beneficiaries are likely to be Countrywide Credit Industries, Pasadena, Calif., and North American Mortgage Co., Santa Rosa, Calif., which top the list of the largest public mortgage banking companies by a wide margin.
Eric Sieracki, investor relations director for Countrywide, says the change will allow the company to better reflect the economic value of retail servcing. An increase in reported earnings could result as early as its first fiscal quarter, which begins March 1, he said.
Terrance Hodel, chairman and chief executive of North American, says his company is likely to benefit in terms of reported earnings. But he is not too happy about the situation.
"The problem was that public financial statements were not comparable," he said. "But they still won't be under the new rule."
The problem, he notes, is that companies will still make their own decisions on the expected life of the portfolio. And while they will be required to discount the assumed cash flows to present value, they will be able to set their own discount rate. He believes that, as a result, comparisons between companies will be no more valid than before.
"We're in the very small minority, but we're against the change," he said.
The lending industry as a whole, meanwhile, has gotten off the hook on a couple of other side issues. Previously, FASB wanted to require that banks preferring to hold their mortgages in securitized form had to record a sale of mortgages and a purchase of securities. It has now eliminated that requirement.
Ms. Sworobuk of America's Community Bankers pointed out that the value of originated servicing rights could now count as capital for banks and thrifts, and this could represent a welcome addition for some institutions.
But servicing rights cannot constitute more than 50% of capital. "Regulators are recognizing that the 50% limit on servicing rights could have a perverse influence, where institutions would actually lose capital if they keep on collecting servicing rights" over the 50% threshold, she said.
She believes it may be easier now to change the 50% limit, but the change would require legislation because the limit is statutory.