The frenzy over FASB 65 seems to be settling down a bit. Nobody is quite happy over the entire proposal to revise the rule, but most lenders appear ready to accept compromises in order to avert what they see as its bigger defects and to avoid long delays.

There is one group, though, that is quite happy about the broad proposal and not much concerned about the details. Consultants who advise lenders on hedging strategies see a business opportunity.

The reason is simple: The value of servicing rights on loans originated by lenders that are intended for sale would appear on their books as assets, just like rights they purchase from other originators.

And with the value of as-- sets on the books jumping sharply, lenders will be even more vulnerable to writedowns because of impairment of the value of servicing rights.

One of the more enthusiastic consultants is Hal B. Hermelee, director of national marketing at the ESN Risk Management Services unit of Hamilton, Carter, Smith, Los Angeles.

"This interest rate sensitive asset is going to start to steamroll on people," he said.

"The originated and purchased servicing combined is going to create tremendous risk, explosive in a period of extensive prepayments," he added.

Rising production will be a partial hedge in those periods, he said, but added that mortgage bankers learned last year that production isn't adequate when prepayments are severe.

Most mortgage banks were forced to take big writedowns on purchased servicing rights during the height of the late refinancing boom, depressing their earnings even while new loan production was the highest in history.

This led many mortgage banks to seek merger partners. Now the entire portfolios of the survivors will be vulnerable. "Hedging of new production will now have to become a standard tool, part of the everyday cost of doing business," said Mr. Hermelee.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.