Fair Value Determinations

Our Approach

We provide a comprehensive and cost-effective approach to the valuation of MBDs. Our valuations are performed at the loan level, and our reports include the precise journal entries to be made and identify the specific places the items related to mortgage banking activities are to be reported in the call report.

Background

See our Accounting & Regulatory Reporting for Mortgage Banking Derivatives white paper for details.

IRLCs

Interest rate lock commitments (“IRLCs”) for mortgage loans that are to be sold into the secondary market are derivatives and must be reported at fair value. The fair value of IRLCs is conceptually related to the fair value that can be generated when the underlying loan is sold in the secondary market. The value of the loan is thus based on several components, including:

• The loan amount
• The interest rate
• The price at which the loan can be sold as of the valuation date
• Discount points and fees to be collected from the borrower
• Direct fees and costs associated with the origination of the loan (processing, underwriting, commissions, closing, etc.)
• The value of the servicing to be retained or the servicing released premium to be received.

Forward Sales Commitments

Mandatory forward sales commitments are also derivatives and must be marked to market. Best efforts sales commitments are not considered to be derivatives until the loan is closed and is thus required to be delivered to the investor. As a result, the change in the value of the best efforts commitment cannot be recorded to offset the change in the value of the related IRLC. To remedy this disconnect, we advise our clients to elect to account for best efforts forward sales commitment at fair value.

Closed Loan Inventory Held for Sale

Similarly, we advise our clients to account for the closed loan inventory at fair value instead of at the lower of cost or market (“LOCOM”). In this way, when the fair value of the forward sales commitment derivatives fall as a result of a decline in market interest rates, the loss can be offset by the gain in the closed loan inventory. Originators that account for the loans at LOCOM cannot recognize this benefit until the loans are purchased.