If the Financial Accounting Standards Board agrees to a proposal by the Mortgage Bankers Association to permit recognition of retained mortgage servicing rights, it would remove the primary motivation for selling such assets.
That would be good news to the MBA. which argued in a letter to FASB that such "accounting-motivated sales and purchases cause lenders to incur unnecessary transactional costs and upset consumers due to changes of loan servicers."
Currently, servicing that is retained after sale of a mortgage originated by a lender is treated as off-balance sheet assets. Only purchased mortgage servicing rights and excess servicing fees receivables are recognized as assets on the lenders' balance sheets.
The FASB staff has sent a prospectus for a possible limited scope project on servicing rights to the Financial Accounting Standards Advisory Committee, the Emerging Issues Task Force and the Financial Instruments Task Force - all FASB-related entities - and they must submit their views to the board by mid-February.
John S. Hopkins, president of a Bethesda. Md., mortgage servicing brokerage firm that bears his name, said the need to recognize assets on the balance sheet ranks ahead of a need for cash and changes in investment strategies as reasons for selling servicing.
Hopkins said a decline in supply could push prices up and make selling for cash more attractive. He add it is difficult to predict the net effect if FASB agreed to the proposed change.
He was skeptical, however, that the change will be made. "The climate is not right for this type of change." he said. "If anything, the accounting firms and regulators have tightened their standards for recognition of servicing rights. Even if FASB were to give its blessing, one wonders how long it would be before the Internal Revenue Service figured out a way to tax the recognized value."
Depository institution regulators will have three options dealing with retained servicing rights if FASB permits their recognition, said Robert Storch, chief accountant for the Federal Deposit Insurance Corporation. He said the retained rights can be used without limitation, subtracted from capital or treated as purchased mortgage servicing rights. Currently. PMSR are valued at the lesser of 90% of the purchase price or fair market value, or 100% of book value. That post-"hair-cut" value can then be applied to capital, although it cannot account for more than 50% of core capital.
In its letter to FASB, MBA noted that analysts already give value to retained mortgage servicing rights in assessing the strength of a mortgage company. Standard and Poor's Corp., for example, "defines a mortgage company's equity as ~tangible net worth (stockholder's equity less goodwill) plus the net value of the servicing portfolio (gross servicing valued at 100 basis points less than the cost of purchased servicing'," MBA wrote. "Freddie Mac is currently considering a proposal to provide its seller/servicers with the ability to meet its minimum net worth requirements through an adjustment to recognize the value of their off-balance sheet servicing.
"MBA believes mortgage servicing rights are every bit as much an asset in the hands of an originator as in the hands of a purchaser of those rights. We further believe that the ~intangible' classification of mortgage servicing is a misnomer given the evolution of the secondary market for mortgage servicing. The very fact that mortgage servicing rights are routinely and actively traded by lenders and investors verifies that they are sufficiently valuable to be treated as an amortizable asset."