The Economic Impact of Recent Accounting Rules

By Gilkeson, James H.; Stengel, Mitchell | Mortgage Banking, February 1999 | Go to article overview

The Economic Impact of Recent Accounting Rules


Gilkeson, James H., Stengel, Mitchell, Mortgage Banking


An analysis of bank call reports over several years shows that small servicers have not been driven out of the business because of the new accounting rules on servicing. Many, in fact, have opted not to put their servicing on their books because it doesn't meet a materiality test that determines whether to report it. The study suggests also that many small servicers do not find it necessary to hedge their servicing directly using derivatives.

In 1995 and 1996, the Financial Accounting Standards Board (FASB) issued two statements, SFAS 122 and SFAS 125, that had important implications for the mortgage banking industry. The most significant and wide-ranging requirement in these statements was that the right to service mortgages must be recognized on the servicer's balance sheet as a mortgage servicing asset (MSA), regardless of whether it was originated or purchased. Prior to these statements, only purchased servicing was booked.

MSAs are volatile assets, being particularly sensitive to changes in market interest rates and prepayment speeds. In effect, then, SFAS 122 and SFAS 125 required mortgage servicers to add a lot of risky assets to their balance sheets.

Some industry observers expressed concern that the statements would force small and midsized servicers to begin extensive (and expensive) hedging operations to manage the added risks. Others suggested that they would drive these servicers out of business, because they were unable or unwilling to absorb the added risks or to afford the technology and personnel needed to value MSAs and test them for impairment.

This article examines the impact of SFAS 122 and 125 on an important subset of mortgage servicing operations: those of commercial banks. Although the number of banks reporting servicing assets quadrupled from 1993 to 1997, we find that an even larger number continued to service mortgages for others without booking any MSAs - most likely because these institutions deemed the assets to be immaterial from an accounting standpoint. There is also no evidence linking increased reporting of servicing assets to increased hedging activities among the group of commercial banks studied.

Finally, although industry consolidation continues, the speed of consolidation has not increased in the wake of SFAS 122 and 125; in fact, there continue to be more commercial banks beginning new servicing operations than exiting the industry. In summary, the new standards have had the positive effect of inducing larger and medium-sized originators to book more servicing - which causes their financial statements to better reflect their business operations - without forcing a large number of small commercial bank servicers to make inordinate investments in technology, personnel and risk-management activities or forcing them out of the industry altogether.

Background

In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights: An Amendment of FASB Statement No. 65." The purpose of the statement was to "require that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired" (SFAS 122, summary).

Under the prior standard, SFAS 65, if an institution originated a mortgage and later sold or securitized the loan (the mortgage asset) while retaining the obligation to service the loan in exchange for a fee (the servicing right), the value of servicing was not recognized on the balance sheet. On the other hand, if an institution purchased servicing rights from another originator or servicer, the purchase cost was recognized on the balance sheet as a mortgage servicing right. This asset was then amortized over the expected life of the loan and was subject to periodic impairment testing to ensure that its book value did not exceed its economic value (the total present value of expected future servicing fees and related income streams less associated costs). …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

The Economic Impact of Recent Accounting Rules
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.