The financial Accounting Standards Board is within three weeks of releasing its much-awaited FAS 65 exposure draft and the statement will reportedly allow for the costs of originated mortgage servicing to be recognized as assets. It will also allow excess servicing to be booked at fair value.

Mortgage bankers approved of the board's rule, but while lenders were supportive, the Mortgage Bankers Association said it still planned to recommend changes to the rule that would, specifically, alter FASB's "stratified" approach to evaluating investments in a lender's mortgage-servicing rights portfolio, and to implement a cumulative catch-up date as a means of making the financial statements of various companies more comparable.

Lenders got a look at the rule when the MBA's FAS 65 task force met with FASB prior to the MBA Financial Management Conference in Boston May 16 to 18. During that meeting, the board members outlined the provisions of the soon-to-be-released statement, and the task force later shared the contents of the exposure draft with its members.

FASB's exposure draft, FAS 65, Accounting for Mortgage Banking activities, which remains subject to change, is likely to be released within the next three-to-four weeks, said Alison Utermohlen, MBA senior manager, financial management. Once published, the board will accept comments for between 60 and 90 days. If a 60-day comment period is approved, the rule could be in effect by the end of 1994.

The exposure draft, as written, would:

* Allow originated mortgage servicing rights to be recognized as assets. There will be no distinction between OMSRs and PMSRs;

* Measure mortgage servicing rights by allocating the cost of the loans between the servicing and the loans (without servicing rights) based on their relative fair value;

* Allocate the cost between mortgage servicing rights loans (without servicing rights) based on the relative fair values if a definitive plan to sell the loans is in place at the acquisition, otherwise at sale date;

* Maintain the distinction between normal and excess servicing fees. Excess servicing is booked at fair value when the loan is sold;

* Recognize gains on the sale of mortgage loans with servicing retained as income. The amount of MSRs capitalized should not be reduced;

* Consider MSRs impaired when the carrying amount of MSRs exceeds the present value of expected future net servicing income;

* Measure impairment based on the present value of expected future net servicing income. A current discount rate should be used;

* Require the creation of a valuation allowance account to recognize impairment;

* Prohibit the reference to MSRs as "intangible assets" to be carried forward;

* Require evaluation for impairment at no greater level of aggregation than by loans serviced with similar risk characteristics - type, size, note rate and term. Valuation allowances should be maintained on a strata-by-strata basis;

* Require enterprise transition accounting counting statements be applied prospectively to new transactions and to impairment evaluations of all amounts capitalized, including those capitalized prior to the statement's release; and

* Make the statement effective for fiscal years starting December 1995, with early application encouraged.

The amendment would allow the costs of originated mortgage servicing to be capitalized rather than being treated as period costs. That change will likely alter the way mortgagers handle their servicing programs. In the past, servicing companies often reported losses on the sale of loans acquired through in-house originations. Those sales would not have been reported had the loans been acquired in a purchase transaction.

"But because accounting treatment often drives business decisions, the ability to capitalize purchased servicing resulted in many mortgage bankers favoring wholesale strategies, even though in-house originations were more cost effective," said Al Brown, senior vice president, First Union Mortgage Corp., of Charlotte, N.C.

Brown, who spoke about the potential benefits of the amendment during the MBA conference, said the rule would also eliminate the need for mortgage bankers to chum their servicing portfolios through sales of originated servicing and subsequent purchases of servicing to allow for capitalization of purchased mortgage servicing rights.

Another benefit, Brown said, was that gains from the sale of mortgage loans will not be applied to reduce the recorded value of mortgage servicing rights, and the proposed amendment will repeal the present FAS 65, Paragraph 17 requirement to reduce the value of PMSR by any gains on the sale of the related mortgages.

Thomas L. Grainger, chief financial officer, Weyerhauser Mortgage Corp., said the FAS 65 proposal was one "that FASB and [the] MBA can live with." Grainger added that if the proposal is approved, it would mean that Weyerhauser, like many mid-sized mortgage companies, would refrain from selling off its retail servicing because of the benefits the Los Angeles-based lender will realize, specifically not having to sell off servicing to allow for capitalization of PMSR.

The FASB decision drew praise from some in the mortgage industry, or at least from one whose job is to watch it: Jonathan Gray, a mortgage market analyst with Sanford C. Berstein." The current accounting method has to be changed," he said, explaining that as implemented, the rule gives investors an understated view of a lender's economic position.

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