Hedging: MBA Offers Guidance on Compliance With New Accounting Standard.(Brief Article)

Over time, the accounting issues that morphed into Financial Accounting Standard 133 have been discussed, debated, revised, and re-issued. But nobody in the mortgage industry has really digested the impact FAS 133 will have on the hedging of mortgage servicing portfolios and other mortgage assets. That only comes with implementation.

There's no way to anticipate all the ramifications of a complex new framework for accounting of derivative assets and hedging tools, such as the financial instruments used to iron out interest rate risk on servicing rights. And the Mortgage Bankers Association of America, as well as many servicing and hedging advisors, are trying to help lenders understand what FAS 133 is going to mean for their balance sheets.

In December, the MBA released a guide to help mortgage bankers comply with the new guidelines for accounting of derivatives and hedging activities. The guide was produced by the MBA's financial management committee, chaired by Denise Sawyer of Bank of America Mortgage, and the MBA's working group for FAS 133, chaired by James Edwards of HomeSide Lending.

One thing just about everyone agrees on is that the stakes for proper implementation of the accounting rules are high. The MBA warns that lenders could face "significant earnings volatility" if they don't do it right. The MBA's guide is the product of a working group that spent hundreds of hours researching and discussing FAS 133 issues.

By establishing standards for achieving hedge accounting, the Financial Accounting Standards Board sought to draw a distinction between purchasing derivatives to manage risk exposure and purchasing derivatives for speculative purposes. To avoid shocks to investors, FAS 133 requires them to "mark to market" changes in the value of their derivatives on their quarterly profit and loss statements. To avoid these shocks, lenders must ...