Risk amount is servicing's next woe.

A substantial amount of the risks and rewards of ownership in the sale of mortgage servicing rights should be passed to the buyer before those rights can be recognized at the date of the sales agreement--but not all--the mortgage banking industry told the Emerging Issues Task Force.

The EITF is struggling with yet another issue regarding the sale of mortgage servicing rights; this time the task force has to iron out inconsistencies with its guidance. EITF hopes to resolve the issue during its meeting Sept. 21 to 29. The task force has had the issue on its agenda since March, but has not been able to come to a resolution.

The debate involves EITF issue 94-5, Determination of what constitutes all risks and rewards and no significant unresolved contingencies in a sale of mortgage loan servicing rights under Issue 89-5.

"The accounting issue is whether inclusion of some or all of these provisions in a mortgage servicing sale contract would preclude the recognition of a sale under Issue 89-5 because all risks have not been passed or whether these type of items are insignificant unresolved contingencies, and therefore, a sale should be recognized and a liability for the contingency should be accrued at the date of sale," EITF said.

To resolve the accounting differences, the Mortgage Bankers Association recommended that EITF amend Issue 89-5 to say that "a sale of mortgage loan servicing rights should not be recognized at the closing date (i.e., the date of the sales agreement) unless substantially all risks and rewards of ownership have irrevocably passed to the buyer and there are no significant unresolved contingencies."

MBA said this wording would clarify the contradictory language in 89-5 and follows one view (View A) suggested by the task force. Even better, it would follow longstanding accounting treatment for these sales. "To our knowledge, this treatment has not been a problem in practice since such sales have rarely, if ever, been reversed and significant adjustments to sales prices generally have not been required."

Although these sales have rarely been reversed, MBA said some in the industry are challenging this treatment where the seller has agreed to adjust the sales price for prepayments that occur within a short period after the closing date. "In their view, which is described as View B in the issue summary [89-51, "the retention of and prepayment risk by the transferor precludes the recognition of a sale until those risks are transferred to the buyer."

"We have concern that proponents of View B believe sale treatment is inappropriate until virtually all risks have passed to the buyer. We believe strongly that, where 89-5 says ~all,' proper interpretation means substantially all," Crestar Mortgage Corp. said. "Clearly, retention of prepayment risk for a short period (e.g., 60 days), a period where prepayments are effectively in process, is a very minor risk in nature and one... easily quantified."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER