Magazine article American Banker

Accounting Debate Turns to Issue of Securitization

Magazine article American Banker

Accounting Debate Turns to Issue of Securitization

Article excerpt

Now that amendments to the rules for valuing mortgage servicing rights are on the verge of adoption, portfolio lenders and their associations are turning to another sticky accounting problem.

The difficulty is how to account for transactions in which lenders swap mortgages for mortgage-backed securities to hold in their own portfolios.

The Financial Accounting Standards Board wanted banks, thrifts, and others to record such a deal as a sale and purchase that could result in a profit or a loss. But it gave the industry a temporary reprieve last month.

Now, the board is expected to revive the sale-and-purchase approach, and lender groups intend to oppose the rule.

Banks and thrifts could end up with servicing rights on their books under the revived amendment. This means an accounting burden and possible earnings volatility with which these institutions have not previously had to deal.

Meanwhile, North American Mortgage Co. may be the first to benefit from the amended rules. It announced last week that it would briefly postpone issuing its quarterly earnings in the hope that it would be able to use the new rules in its report.

Unlike other top mortgage banking companies, North American has not been active in the wholesale market, so its servicing portfolio consists almost entirely of originated rights, and it has very large asset values that do not now appear on the balance sheet.

Thus, the Santa Rosa, Calif., company should be able to report significantly stronger earnings under the new rules than without them.

Terrance Hodel, president, wrote in North American's annual report that thrifts and companies owned by commercial banks had an edge in the marketplace last year. …

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