Mortgage bankers eager for FASB to rethink its position on the stratified approach to impaired mortgage servicing rights are going to be disappointed by the boards soon-to-be-released FAS 65 exposure draft. But while mortgage banks are preparing for the next round, some industry analysts are encouraged by a recent delay in the drafts ballot review process that could signal that changes are afoot. The board, which delayed the release of its exposure draft until the first week of July from the previously reported June 6, said it will keep the impairment provision in the draft, despite complaints from mortgage bankers and others in the financial services industry. The FAS 65 draft statement, Accounting for Certain Mortgage Banking Activities, will also allow originated mortgage servicing rights to be recognized as assets, and will make no distinction between originated mortgage servicing rights and purchased mortgage servicing rights. The biggest issue of contention with the pending draft for financial institutions thus far is the boards decision to treat the securitization of mortgage loans as the sale of mortgage loans and the repurchase of mortgage-backed securities. The difference between the fair value of the resulting mortgage-backed securities and the carrying amount of the loans would be recorded in earnings, said Janet Danola, FASB project manager. Bankers wince at the idea of remeasuring their mortgage- backed securities at fair value, mostly because banks keep these instruments as investments, while other financial institutions sell the instruments off. Measuring these securitizations at fair value is something that we are going to have a hard time living with, said one bank association representative. But Danola contends that the delay in issuing the draft is routine, and changes in the preballot drafts have only been editorial in nature. We are only making minor editorial changes and then getting the document into production, she said. She also explained that two of the board members have not turned in their preballot drafts, and said she doesnt expect to see any big changes. The two board members have been very busy, she said. But Danolas explanation does not mean all hopes for compromise on the pending rule are dashed. The exposure draft will have a 90-day comment period allowing the industry to address each of its concerns with the document which will weigh heavily in the ensuing debate over the issue. The provision that mortgage bankers have apparently lost onat least for this roundis the stratified approach to impaired mortgage servicing rights. Danola said the statement would require an entity to stratify mortgage servicing rights and excess servicing receivables based on the risk characteristics of the underlying loans, then compare each strata with its fair value to determine whether theres an impairment loss that should be recognized. The loss would then be recognized through a valuation allowance, and allowance in future periods could be adjusted up or down depending on the amount of impairment. Mortgage bankers werent surprised by the FASB decision, but said they would take up this issue again when the exposure drafts comment period begins.
