Financial institution regulators probably would be the principal opponents to an expected proposal by the Mortgage Bankers Association that the Financial Accounting Standards Board reverse current practices and permit the recognition of the value of originated and retained mortgage servicing when a loan is sold.
"All banking and thrift agencies would be concerned because under current GAAP rules there are loose standards for measuring impairment," said a staff official at the Office of Thrift Supervision.
The regulators' chief concern is that servicing rights be properly valued for purposes of regulatory capital (see related story above).
The MBA board Sept. 10 approved a staff recommendation that FASB be asked to change the rules, but a formal request has not been sent. The MBA win ask FASB to amend Statements of Financial Accounting Standards 65 and 91 "to recognize the value of originated and retained mortgage servicing at the time a loan is sold equal to the amortized equal to the unamortized balance of loan origination net of origination income. MBA recommends further that under no circumstances shall the recognized value of the originated servicing exceed its net present value."
Under SFAS 91, loan origination fees and certain direct loan origination costs must be deferred and taken into income over the life of the loan as an adjustment of loan yield, the MBA explained. When the loan is sold, however, the fees are taken into income, it noted.
"MBA recommends that the unamortized balance of direct loan origination costs remain on the books as the value of originated mortgage servicing with the loan fees being taken into income," the MBA board resolution said.
"This will result in more gain (or less loss) being recognized on the sale of originated mortgage loans than is true under the current rules. On the other hand, the effect of amortizing these costs over the life of the servicing will reduce the amount of servicing income over time.
If FASB should reverse its position, it would ease the pressure to set rules for "table funding." The Emerging Issues Task Force is expected to take up a draft consensus statement at its Sept. 24 meeting that will set guidelines for a lender to account for a loan as purchased from a mortgage broker.
The lender, because servicing rights on originated loans cannot be booked as an asset, often "brings to the table" the actual loan funds for a loan originated by a broker. The lender "purchases" the loan and the servicing rights from the broker. If the MBA proposal were approved, the table funding exercise would be unnecessary (see The Mortgage Marketplace, Sept. 7, page 3).
The MBA proposal would apply to loans on one- to four-family residential mortgages.