As bankers continue to wrestle with a new accounting rule that alters the way mortgage servicing rights are valued, they also must contend with an additional provision that fine-tunes the original ruling.

Financial Accounting Standards Board statement 125, which becomes effective in January, comes on the heels of FAS 122, which was adopted earlier this year.

One consequence of FAS 125, which must be implemented by the end of 1997, is that "excess servicing rights" will no longer be differentiated from normal rights.

A right becomes excess when the servicing turns out to cost less than first estimated, so the net income exceeds the figure originally booked.

Unlike the more heralded FAS 122, FAS 125 is not devoted exclusively to mortgage servicing. Many industry observers say that even though the new rule will have important ramifications for the industry, the overall impact will be mild compared with that of FAS 122.

"It is not the watershed that FAS 122 has been," said Robert N. Husted, principal of MIAC Risk Management Services, a New York-based consulting firm.

As a result of FAS 122, mortgage bankers were required to include originated servicing rights as well as purchased servicing on their balance sheets.

Proponents of FAS 122 say that the rule has made it easier to compare the balance sheets of different mortgage banks. But critics maintain that FAS 122 has caused some companies to price too aggressively in order to compensate for the additional interest rate risk that has resulted from capitalizing originated purchasing rights.

David W. Leeds, national director of mortgage banking at Ernst & Young, said that it makes sense in theory for excess servicing fees to be combined with originated servicing rights on the balance sheet.

He added, however, that this provision will not help smaller servicers, and that they will continue to be pushed out of the business because of the pricing pressures that have resulted from the implementation of FAS 122.

Mr. Husted said that he didn't think FAS 125 in of itself will create more merger activity or servicing portfolio sales. And he added that it is too soon to say how much of this year's merger activity could be attributed to FAS 122.

Paul Van Valkenburg, also a principal of MIAC Risk Management Services, said that FAS 125 is another reason mortgage bankers need to be more aware of the balance-sheet risks in rate movements.

"People need to start actively making portfolio decisions by integrating the accounting effects," Mr. Van Valkenburg said.

However, he added that the excess servicing provision will make it less burdensome for mortgage bankers to generate excess servicing, since it can be combined with normal servicing. As a result, there may be increased sales or trading of excess servicing.

Another change that will result from FAS 125 is that retained servicing rights must be treated as an asset if they are adequately compensated and as a liability if they are not adequately compensated.

Alison Utermohlen, senior director at the Mortgage Bankers Association of America, said a major concern that its members have is that there is uncertainty regarding the definition of the term "adequate compensation".

FAS 125 states that adequate compensation is "the amount of benefits of servicing that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace."

Ms. Utermohlen said that the MBA would like some guidance from FASB to determine exactly what would be defined as "adequate," since it will affect the amortization of assets if a servicer intended to retain these assets on its balance sheet. Amortization refers to the repayment of mortgage debt, both principal and interest, that is paid over a fixed period of time.

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