FASB Proposes Making 'Fair Value' Accounting Optional.(Financial Accounting Standards Board)

A controversial accounting change that had divided the mortgage industry may no longer be very divisive, but details of the new proposal remain uncertain.

That's because the Financial Accounting Standards Board has proposed to let the industry have it both ways by making "fair value" accounting an elective way to treat mortgage servicing rights. The parameters for making that choice, and the details about whether and under what circumstances a lender could change its choice, remain to be determined by FASB staff.

At a May 19 meeting, FASB discussed the accounting treatment of mortgage servicing rights. Under current rules, mortgage servicing rights are generally subject to LOCOM accounting, meaning they are valued at the lower of cost or market value and cannot be raised above the initial cost basis.

This meant that large servicers had to pass certain tests to achieve "hedge accounting" treatment in order to avoid volatility in their balance sheets.

Those large servicers have argued that fair-value accounting for MSRs is more fair, because it allows changes in the value of the servicing asset and the derivative instruments used to hedge servicing rights to naturally offset each other without the complexity of hedge accounting treatment.

But smaller servicers had some objections, fearing that fair-value accounting would add complexity to tracking their MSRs and could increase volatility. The elective nature of the FASB ...