Magazine article American Banker

Accounting Change on Originations May Prove to Be a Mixed Blessing

Magazine article American Banker

Accounting Change on Originations May Prove to Be a Mixed Blessing

Article excerpt

Possible changes in accounting for originated mortgage servicing rights, heralded earlier as a boon to publicly held mortgage companies, may instead prove to be a mixed blessing.

Bruce Schnelwar, chief financial officer of Margaretten & Co., Perth Amboy, N.J., said he expected reported earnings figures to become more volatile. "But they will represent a truer picture of earnings," he said.

Mr. Schnelwar was a member of a panel on the possible rule changes by the Financial Accounting Standards Board at a seminar in New York sponsored by Baltimore-based Alex. Brown & Sons.

At present, servicing rights do not appear on the balance sheet of the originator even when the originator sells the loan itself in the secondary market.

Earnings Understated

But purchased servicing rights do appear as assets. This means that the earnings of mortgage banking companies are understated because they do not include the present value of the servicing rights already in hand.

The change being considered by the board would immediately increase reported earnings of mortgage banks. But it would also eliminate much of the steady stream of earnings from servicing that in the past had offset fluctuations in origination income. In turn, this could make earnings more volatile.

Sy Jacobs, an analyst with Alex. Brown, said, "Earnings would be less predictable, but at much higher levels." He also said companies would be free to hold on to servicing rights rather than selling them to book earnings. …

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