In September 2006, FASB accepted a sweeping new standard redefining a core accounting concept – Fair Value. This new standard supplants over 60 prior FASB pronouncements. Because the scope of the changes is so pervasive, FASB gave firms until November 2007 to adopt the new standard. Mortgage companies are required to carefully review and update their asset valuation methodologies for their MSRs, Whole Loans (both in the pipeline and portfolio), retained Residual Interests and all of their hedge instruments.

Not only must each firm re-evaluate their asset valuation methodologies but also the business control procedures that support these valuation methodologies. Each procedure must be reviewed and revised. Consequently, the SFAS 157 standard represents considerable challenges for implementation but also will have a significant impact on the mortgage industry.

In MIAC’s last quarterly newsletter, Tina Reid, Senior Vice President and co-head of MIAC’s Secondary Solutions Group, outlined the implications of SFAS 159 for mortgage bankers’ pipelines. In this issue, Sachit Kumar, Managing Director and Head of MIAC’s Capital Markets Group, highlights some important issues for effectively implementing SFAS 157 for MSRs. In subsequent quarterly editions, MIAC will address some of the SFAS 157 implications for Whole Loans, Residual Interests and Interest Rate Derivative instruments.

The tasks ahead for mortgage industry participants in understanding the implications for SFAS 157 are two-fold. First, a mortgage company CFO must understand the very new definition of Fair Value identified in SFAS 157 – a daunting task given the creation of new terms and principles to a very core accounting concept. Secondly, and even more challenging, mortgage companies must sort through how to implement these new interpretations for each of the mortgage assets and liabilities. In this newsletter, we will first look at those new Fair Value concepts likely to be germane to MSR valuation. Then, we will undertake an analysis of SFAS 157 potential impact for implementing SFAS 157-compliant MSR valuation methods.