Residential lenders have joined other financial services companies in opposing the Financial Accounting Standards Board's latest proposal on derivatives reporting.
Many banks have already voiced opposition to the proposed rule, which would force them to value derivatives at market and report changes in value in quarterly income statements.
Derivatives - contracts whose values are tied to a variable such as interest or currency exchange rates - are used by many financial institutions to hedge against the volatility of these rates.
Representatives of the Mortgage Bankers Association of America testified at a four-day hearing at the board's headquarters in Norwalk, Conn. The hearings ended Wednesday.
Anne McCallion, senior vice president for investor relations at Countrywide Credit Industries, Pasadena, Calif., the nation's second- largest originator and servicer of mortgages, testified that lenders oppose the proposal because movements in interest rates will create earnings volatility that currently does not exist in the business.
"When interest rates move, that event generally doesn't create income or expense for us," she said.
Many mortgage lenders mitigate the risk by selling loans for future delivery once they have made a rate commitment to a potential borrower. But under the board's proposal, such a forward sale would be considered a derivative and as a result, it would have to be marked to market.
Alison Utermohlen, senior director at the Mortgage Bankers Association , said that the forward sales should be treated not as a derivative but as a firm commitment because they generally are made while the borrower is still in the application process, not after the loan has been funded.
Ms. Utermohlen added that mortgage bankers enter into these commitments to hedge the change in fair value of loans in their pipelines of approved, but unclosed, loans and in their inventories of closed loans. Unless FASB redefines a firm commitment, loans in a pipeline would not be recognized as assets and could not be used as hedged items.
"The pipeline could not be used to offset losses," Ms. Utermohlen said.
Ms. McCallion said FASB has been receptive to the concerns of the mortgage banking industry, and she added that a slight change in the board's exposure draft regarding the definition of a firm commitment would allay lender concerns about the derivatives proposal.
"The pipeline needs to get accounting recognition," Ms. McCallion said.
The board's chairman, Dennis R. Beresford, said more than 250 letters had been received with suggestions on how to modify the proposal, which is scheduled to be implemented this summer. He added that FASB will look at all of them and then begin deliberations again.