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Hedging: New Accounting Rules Put Focus on Servicing Valuation Methodology.(Financial Accounting Statement 133 for mortgage lenders)(Brief Article)
As lenders struggle to implement new accounting procedures, they are also are starting to grapple with the ramifications that the rules may have on their business.
Financial Accounting Statement 133, which is starting to take effect this year, will affect how mortgage lenders report quarterly profit and loss information. And those accounting rules could in turn "have a significant impact on servicing values," said Timothy Ryan of PricewaterhouseCoopers, Boston.
"The problem with this standard," Mr. Ryan said at the MBA National Mortgage Servicing Conference, "is that it is extremely difficult to interpret. It's extremely difficult to apply."
The fundamental premise of FAS 133 is that all derivatives should be recognized on the balance sheet at fair market value. That includes the instruments used by many lenders to hedge their servicing portfolios, which are subject to runoff when rates fall. To protect quarterly income statements from the extreme volatility related to hedging activities, the Financial Accounting Standards Board created "hedge accounting." But even lenders that achieve hedge accounting will find that the new rule could increase earnings volatility, because no hedge offers a perfect match against the servicing asset.
The problem is that servicing rights are recognized at the lower of cost or market as the rule stands today (and significant issues remain unresolved).
So if servicing values rise, lenders that do not have hedge accounting in place cannot offset the losses on the hedge instruments with the increase in the value of the servicing asset.
For a servicer with servicing ...
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Source: HighBeam Research, Hedging: New Accounting Rules Put Focus on Servicing Valuation...