Mortgage Lenders’ Accounting Questioned
Federal regulators on Tuesday raised red flags about the accounting methods that mortgage bankers have used to determine the value of their loan-servicing businesses.
The advisory by a group of federal agencies came on the heels of a credit warning issued last week by Fitch Ratings against Calabasas-based mortgage lender Countrywide Financial Corp. Taken together, the actions suggest that mortgage bankers are coming under increasing pressure to recognize that their loan-servicing assets may have taken a larger-than-acknowledged hit during the recent wave of home refinancings.
Indeed, the Federal Financial Institutions Examination Council said it found numerous problems that warranted “additional scrutiny” as to how mortgage banks determine the value of their loan-servicing fees.
Such fees are calculated into loan rates and are collected by lenders for handling mortgage payments and providing other services during the life of the loans. Lenders estimate the long-term value of the fees and record them as assets that -- in the cases of the largest banks -- can total billions of dollars.
But the value of these loan-servicing businesses has declined sharply as a nearly two-year refinancing boom has led many homeowners to retire their loans early, forcing lenders to write down the fees associated with them.
Last year, for example, Countrywide reduced the value of its loan-servicing fees by $3.4 billion, which was more than offset by profit generated by new loans and other factors. Washington Mutual Inc., one of California’s largest mortgage lenders, posted a $3.2-billion write-down on its fees.
Executives at Countrywide and Washington Mutual said Tuesday that they were in compliance with the guidelines included in the regulators’ report and did not expect having to change the estimated value of their loan-servicing fees.
The regulators “are laying out what are the best practices ... and they are very much in line with the way we conduct our business,” said Countrywide’s chief operating officer, Stanford Kurland.
Without identifying the offending institutions, federal regulators said they found evidence of “questionable, inappropriate or unsupported” items in the way some lenders are valuing their mortgage-servicing rights.
They also cited instances of companies disregarding widely available market information when determining their asset values. In addition, they said some lenders are “changing assumptions” that go into their calculations “without compelling reason.”
The report and guidelines issued by the council -- which is made up of officials from the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision -- are part of a long and often contentious debate in the mortgage industry about differing methods used to value their loan-servicing assets.
“It’s very subjective,” said Robert P. Napoli, a financial industry analyst at U.S. Bancorp Piper Jaffray.
Napoli and industry analyst Michael McMahon of Sandler O’Neil & Partners said most of the large mortgage banks -- including Countrywide -- have been conservative and should not face any widespread write-downs or other problems.
