Luminent Says Hedge Accounting Not Worth Cost.

If you believe that mortgage rates have finally come out of a trough and are likely to edge up over the course of 2006 - as many economists do - then it isn't surprising that some lenders are managing their portfolios to reflect this change.

But that "repositioning," like a lot of New Year's resolutions, may involve some pain before any gain is achieved. And in the case of at least one mortgage company, the repositioning includes a change of heart on hedge accounting.

Luminent Mortgage, a REIT that trades on the New York Stock Exchange, is among the portfolio lenders that are making a transition on its balance sheet. But Luminent is doing more than just selling part of its portfolio. The company has also decided to abandon hedge accounting.

Luminent said that effective at the end of last year, it will no longer use hedge accounting as defined in Financial Accounting Standard 133, which defines accounting rules for derivatives and hedging instruments. That does not mean that Luminent is abandoning hedging its portfolio, but it does mean the company will have to recognize changes in the value of its hedging instruments in its quarterly consolidated statement of operations.

Essentially, Luminent decided that the benefits of easing volatility in its results was outweighed by the cost associated with hedge accounting.

To make sure investors understand its operations, Luminent said it will continue to present REIT taxable net income results in addition to GAAP results, including a reconciliation of the two. In doing so, Luminent is joining a long list of company's that don't want GAAP to be seen as the sole measure of their financial results. Fannie Mae, for instance, in the past has presented "core operating" results alongside its GAAP results to highlight the impact of various accounting anomalies.

In the case of Luminent, company officials noted that taxable REIT net income ultimately determines the amount of its dividend payment to stockholders.