CHICAGO -- Securities analysts have been saying for years that the earnings of mortgage banking companies are understated. But a new accounting rule could change the situation.

Analysts are enthusiastic about the rule, being drafted by the Financial Accounting Standards Board, because it would improve the reported earnings of the dozen or so publicly owned mortgage companies.

While some executives who gathered here this week for the annual convention of the Mortgage Bankers Association applauded the board's intentions, most were too preoccupied with the refinancing boom to weigh the implications of an accounting change that may be a year away.

And for privately owned mortgage companies, the benefits, though significant, are less obvious.

Counting Originated Rights

Mortgage banks are in business to acquire and derive income from mortgage servicing rights. They acquire rights by originating loans and by buying loans from brokers or correspondents. Either way, these rights have a ready market value and can be resold with a phone call.

But the purchased rights appear as assets on the balance sheet and the originated rights do not.

Earlier this month, the accounting board voted unanimously to draft a new rule that would require originated rights to be booked as assets, and thus to count toward earnings.

Most observers believe the rule is a shoo-in because it makes so much sense. The final form of the rule, which would also deal with writedowns for impairment of the servicing asset, is uncertain, but the major thrust is not likely to be changed.

Caution to Investors

"This would put the reported earnings of mortgage banks more in line with the economic value they are creating," said Jonathan Gray, an analyst with Sanford C. Bernstein & Co.

He added that the effect on individual companies would be uneven and would depend in large measure on their business mix. Companies with strong origination capabilities would obviously fare best, he said.

Sy Jacobs, an analyst in New York with Alex. Brown & Sons, took a slightly different tack. "We think that mortgage banking stocks will react favorably to this, development in the short term, and then hunker down for a fairly long period of speculation and, inevitably, some confusion," he wrote in a recent bulletin to clients.

Possible Winners

"We caution investors not to get carried away with the FASB angle, since it does nothing to change the economics of the business. The opportunity centers strictly on the fact that these are generally cheap stocks on what we have felt are, and are now close to being proven to be, understated earnings."

He sees the biggest winners, in order, as North American Mortgage, Margaretten Financial, American Residential, Plaza Home Mortgage, and Countrywide Credit Industries.

"The benefit to these players could be in an approximate range of a 25% to 100% increase in reported earnings," he wrote.

Angelo Mozilo, vice chairman of Countrywide Credit, appeared pleased about the move by the accounting standards board, but remained cautious. "If they rule on this properly, it is very positive," he said. "It puts everybody on a level playing field."

Mr. Mozilo pushed the board to change the rule, known as FASB 65, when he was president of the Mortgage Bankers Association a few years ago.

Significant Benefits Seen

Another former association president, Ronnie Wynn, president of Colonial Mortgage Co., Montgomery, Ala., pointed out that the benefits of an accounting standards board change would be significant even to private companies.

"The change would make it easier to explain your earnings to the banks that we borrow from," he said. "I think we'll see more banks who are willing to consider lending to mortgage companies."

David A. Frank, president of Margaretten & Co., Perth Amboy, N.J., said his company was also among the leaders of the effort to get the rule changed. "The present accounting has been driving people to take uneconomic steps, such as churning their servicing," he said.

'Impairment Issue'

With mortgage companies no longer under pressure to cash in servicing rights to smooth earnings, the supply of rights would shrink and buyers might bid up prices, according to Glen Ohl, executive vice president of Arcs Mortgage Corp., Calabasas, Calif., a subsidiary of Bank of New York.

Mr. Ohl also sounded one cautionary note. "One focus of the FASB rule is going to be the impairment issue," he said. "If you put servicing rights onto the balance sheet, you have to have standards for dealing with impairment of the asset. There has to be a uniform treatment of this impairment."

The accounting board has now put the rule change on what it calls a fast track, meaning a proposal could be ready in less than a year.

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