The proposed amendments to FAS 65, Accounting for Certain Mortgage Banking Activities, will level the playing field between retail and wholesale lenders, but experts say the changes, if adopted, will also exacerbate existing price wars among the largest mortgage banking players.
Because retail originations will result in larger marketing gains, companies with newly increased origination margins may become more price competitive, especially in a declining origination market, contends David S. Dusenbury, an analyst with Salomon Brothers in a report titled, Mortgage BankingBeyond the Refinance Wave.
The report raises three potential concerns associated with recognizing originated mortgage servicing rights on the balance sheet, and increased price competition topped the list.
There is noise right now in the competition between mortgage bankers, Dusenbury said, explaining if FAS 65 is approved as proposed, the inconsistencies in the recognition of originated mortgage servicing rights exists between retail and wholesale mortgage lenders will be eliminated, allowing retail lenders to plan their competitive strategies on a cost basis rather than the accounting-motivated basis they now employ.
FASB prevents retail lenders from recognizing originated mortgage servicing rights as tangible assets separate from the basis of the originated loan. But the board indicated in its upcoming FAS 65 exposure draftwhich is expected to be released in early Julyit will allow that recognition. And if the draft is adopted, total assets for retail lenders will increase as more OMSRs are recognized on their financial statements.
The stronger capital positions they would realize will initiate a chain reaction that would end with those lenders in a better position to slash prices and capture market share, Dusenbury said.
Those companies with a higher proportion of retail originations will obviously benefit the most, he said. If we assume that servicing is valued at 95 basis points using the relative fair value approach and amortize at an annualized run-off rate of 15%, we expect after-tax net income to increase significantly for [them].
Dusenbury said of the financial institutions Salomon analyzes, Mar-garetten Financial and American Residential would recognize the biggest increases to earnings, followed by Fleet Mortgage Group and Countrywide Credit Industries. Margaretten, which announced it would be acquired by Chemical Bank May 12, would realize growth earnings greater than 100%, he added.
