The Financial Accounting Standards Board's new
The draft guidance, issued in response to
"This will cause many owners of the asset to more accurately assess their performance not only in recapture but the gain on sale associated with any refinance," said Tom Piercy, director, MSR advisory, at Mortgage Capital Trading.
While the guidance is clear on the single unit of account question, it leaves other matters open such as how home equity lines of credit would be treated.
"The other question that should be asked is whether closed-end seconds or HELOCs would be included in this category," said Piercy.
The draft accounting standards update also leaves the exact definition of "recapture" open to interpretation, according to an analysis by Bose George, Frankie Labetti and Graham Bundy, researchers at Keefe, Bruyette & Woods.
"The board's view appears preferable to setting clear lines, which might not be appropriate as the market evolves. So market participants would value MSRs based on fair value, which is the price that market participants would be willing to buy or sell the MSR," they wrote.
The history of recapture in the MSR market
Current market value for MSRs generally reflect some element of the ability to solicit borrowers for refinancing, although the amount varies.
"There is no consistency as to what level may be applied by buyers, but the fact that recapture has become a vital component for any MSR buyer in achieving its targeted yields should lead to this proposed ASU becoming policy," Piercy said.
Because some element of recapture is already part of the market and FASB's draft doesn't explicitly define it, the new draft guidance appears unlikely to significantly change valuations if finalized.
"We do not anticipate much, if any, write-up of the asset under fair market value accounting given the significant price levels paid over the past 3-4 years for MSRs," Piercy said.
Mike Carnes, managing director of the valuations group at MIAC Analytics, also said he anticipated that the new guidance would be unlikely to have much impact on the market if it were to move forward, as it typically already included directly or in prepayment projections.
"Many of the largest servicers already directly incorporate recapture and if they're not directly incorporating chances are good they are indirectly incorporating it in the form of modeled CPRs that are net of recapture," Carnes said.
While the value of recapture may ebb and flow as refinancing opportunities do, Carnes said he hasn't traded a deal that didn't include it in at least 10 years, if not more.
Piercy also said history has shown recapture to be a recurring factor in the market for mortgage servicing rights for over a decade.
"We first encountered the value of recapture being imputed into the valuation of MSRs back in the early 1990s when no-cost refinancing originations became more prevalent," said Piercy. "It was again highlighted with lower interest rates after the financial crisis from 2008-2010, and then
