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New Accounting Choice Could Vex Servicers.(mortgage services)
There is good news for the mortgage industry. The Financial Accounting Standards Board - source of many industry headaches over the years - has acquiesced to industry requests that fair market accounting be allowed for mortgage servicing rights.
But not everyone is likely to take the FASB up on that offer. Some lenders are just fine with the present LOCOM (lower of cost or market) limitation on servicing values, coupled with the option of using hedge accounting if your hedging strategy qualifies.
On the other hand, fair market accounting simplifies the treatment of the servicing asset and probably provides a better economic picture of the asset.
But at what price? Lenders that choose fair market accounting may find themselves trying to explain greater swings, both up and down, in the assets value to investors.
The servicing asset consists of some 50 cash flow items, according to executives from PricewaterhouseCoopers who spoke at the recent Mortgage Bankers Association national servicing conference in Phoenix. Those cash flow streams include items such as corporate advances, escrow advances and other mortgage banking income.
Marking mortgage servicing rights to market might ease the burdens associated with hedge accounting rules under FASB's current guidelines.
"Essentially, this proposed amendment can reduce some of the risk of hedging the asset from an accounting perspective," said Bryan Heft, senior ...
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Source: HighBeam Research, New Accounting Choice Could Vex Servicers.(mortgage services)