FASB Proposes Including Recapture in Residential MSR Valuations

Summary

On September 23, 2026, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update, Transfers and Servicing: Servicing Assets and Liabilities (Subtopic 860-50), Mortgage Servicing Rights: Recapture. The proposal would require institutions to include the value of recapture when they measure residential mortgage servicing rights (MSRs). The change would affect every institution that capitalizes residential MSRs, whether it carries them at fair value or amortized cost. FASB will accept comments on the proposed changes through November 9, 2026.
Recapture refers to a servicer’s ability to solicit a borrower to refinance an existing mortgage and keep the servicing on the new loan. In a refinance, the proceeds of the new loan pay off the existing loan and end the servicing income on it, which is why faster prepayments reduce MSR value. When the servicer originates the refinance and keeps the servicing, that income continues on the new loan, though the amount may differ if the new loan’s balance or servicing fee changes. Recapture value is what those continuing cash flows are worth.

Why FASB Is Acting

Subtopic 860-50 requires fair value measurement of MSRs but doesn’t say whether that measurement should include recapture. FASB and its Emerging Issues Task Force (EITF) found that practice varies as a result:

• Institutions generally include recapture when they measure acquired MSRs, because the purchase price reflects it. They may or may not include it when they measure MSRs retained from their own loan sales.
• In later measurements, some institutions exclude recapture, some include it as an explicit input, and some reflect it implicitly by adjusting other assumptions.

FASB also observed that market participants generally assign value to recapture, and MSR trade prices reflect it. The proposal aims to align MSR measurement with how the market prices these assets and to improve comparability across institutions.

What the Proposal Would Do

• Treat recapture and the MSR as a single unit of account. Institutions would value all rights and obligations in a residential mortgage servicing contract together, including the ability to solicit borrowers for refinancing.
• Recognize the borrower relationship. FASB would delete the sentence in paragraph 860-50-35-17 stating that “the mortgage servicing asset represents a contractual relationship between the servicer and the investor in the mortgage loan, not between the servicer and the borrower.” Removing it acknowledges that recapture value depends on the servicer’s relationship with the borrower.
• Link “fair value” to Topic 820. The proposal ties the term to the Topic 820 definition: the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.
• Leave recapture undefined. FASB chose not to prescribe which cash flows make up recapture, so institutions would determine them based on the assumptions a market participant would use. Value beyond recapture, such as cross-selling opportunities, would count only if a market participant would pay for it.
• Apply to all entities. Public and private institutions alike would follow the guidance.

What the Proposal Would Not Change

• Amortization. Institutions using the amortization method would still exclude recapture when they determine the amortization pattern. Recapture would enter only the fair value used for impairment testing.
• Disclosures. FASB doesn’t propose new disclosure requirements. It concluded that existing Subtopic 860-50 and Topic 820 disclosures give investors enough information.
• Other servicing assets. The proposal covers residential MSRs only. It doesn’t reach servicing assets for commercial, auto, or other non-mortgage loans.

What the Change Could Mean

The effect at adoption depends on current practice. FASB notes that some institutions already include recapture, so they may see little change at adoption. Institutions whose valuations exclude recapture today would likely see a larger effect.

Institutions using the fair value method would remeasure their MSRs at the beginning of the adoption year and record the difference as a cumulative-effect adjustment to opening retained earnings.

Institutions using the amortization method would test for impairment at the beginning of the adoption year, using fair value that includes recapture. FASB expects few impairments, because including recapture generally raises MSR value. Under existing impairment guidance, a higher fair value can reduce a previously recorded valuation allowance, but it doesn’t raise the carrying amount above amortized cost.

The rate environment matters. Recapture has value only when borrowers have a reason to refinance, so it tends to add less to fair value when most loans in a portfolio carry rates below current market rates, and more when rates fall. As a result, the size of any transition adjustment may depend on market conditions at the adoption date.

Institution-specific experience may not carry over. An institution’s own recapture results may differ from what market participants assume, in either direction. Under Topic 820, fair value would reflect what a market participant would pay, not the institution’s own recapture rate.

Post-transition. Because the proposal also applies to initial measurement, institutions that sell loans servicing-retained would include recapture in the fair value of each newly capitalized MSR, which could increase the gain on sale they recognize going forward.

Information to Start Gathering

Whatever the final standard looks like, institutions can prepare by reviewing:

• Historical refinance retention: how many serviced loans that paid off through a refinance the institution originated again, measured by count and balance and broken out by product.
• Future strategy: whether recaptured loans will return to the servicing portfolio, be sold servicing-released, or be held on the balance sheet.
• Servicing contract terms, investor guidelines, or subservicing arrangements that limit the institution’s ability to solicit borrowers.
• How a transition adjustment and a larger MSR balance could interact with regulatory capital, including the capital treatment of MSRs for banks and net worth for credit unions.
• How the current MSR valuation treats prepayment speeds, since some valuations include recapture implicitly through that assumption.

Considerations from an Auditor’s Perspective

FASB asked respondents whether the proposal raises auditing challenges, which signals that it expects the recapture assumption to get close attention. Because MSR fair values rely heavily on unobservable inputs, institutions should expect their auditors to ask questions such as:

• Market participant or entity-specific? Does the recapture assumption reflect market participant assumptions or the institution’s own experience?
• Double counting. If the valuation already reflects recapture implicitly, for example through a lower prepayment speed, how does the institution avoid counting it twice when it adds an explicit input?
• Market corroboration. Does the resulting fair value line up with observable MSR trade prices, broker surveys, or peer valuations?
• Data support. Is the recapture history complete and accurate, and do controls cover how the institution pulls and reviews that data?
• Sensitivity. How sensitive is fair value to changes in recapture assumptions, particularly in rate scenarios that increase or decrease refinance activity?
• Contract terms. Do investor guidelines, subservicing agreements, or solicitation restrictions limit the institution’s ability to recapture?
• Transition. How did the institution calculate the cumulative-effect adjustment, and do its disclosures describe the nature of the change, the reason for it, and the method it applied?
• Third-party valuations. When an outside provider prepares the valuation, does management understand the recapture methodology well enough to evaluate and own the assumption?

Timeline and How to Comment

FASB will set the effective date after it reviews stakeholder feedback. Early adoption is permitted. Among its questions for respondents, FASB asks how much time institutions would need to implement the change and whether private entities should get a later effective date.

Institutions can submit comments through November 9, 2026, on FASB’s Documents Open for Comment page, referencing File No. 2026-ED600.

Wilary Winn’s Perspective

Wilary Winn is reviewing the proposal and what it means for the MSR valuations we provide to clients. We’ll share updates as FASB moves toward a final standard. If you have questions about how the proposal could affect your institution, please contact us.

For more on recapture and MSR modeling, see our WW University 2026 session, MSR Valuations: Assumptions, Recapture, & Accounting.

This article summarizes a proposed accounting standard for informational purposes and doesn’t constitute accounting, legal, or regulatory advice. Institutions should consult their auditors and advisors about how the final guidance applies to them.