Accounting for mortgage banking activities

Mortgage banking covers relatively advanced financial activities, including the subtleties of creating subsidiaries, hedges and mortgage services. Therefore, the accounting treatment of these activities is relatively complex. Accounting includes:

• Interest-locked liabilities
• Mortgage loan sales obligations
• Loan for sale
• Mortgage Service Right

This white paper covers accounting and management reporting requirements relating to interest bearing liabilities, mortgage sales obligations, and closed loans held for sale. The accompanying documents cover the requirements for mortgage service rights.

Interest-rate lock commitments

Interest rate lock guarantees (IRLCs) are contracts where a borrower agrees to issue credit to a borrower under certain terms and conditions where the interest rate and maximum loan amount will be determined and financed in advance. Under the agreement, the borrower undertakes to lend a fixed or variable rate to a potential borrower (subject to the borrower’s consent), regardless of whether interest rates are constantly changing in the market or at a fixed interest rate. . The types of IRLCs for mortgage lending are:

• Apply lock for fixed rate loans. The borrower can close the current market rate for a fixed interest rate.
• Loan interest guarantee. The interest rate can “float” with market interest rates until the date on which the rate is set.

The FASB Accounting Standards Code (“FASB ASC”) stipulates that the IRLC of a mortgage loan used for resale is a derivative and must be accounted for at fair value in the balance sheet. [1] FASB ASC Subject 820-Measurement and Disclosure of Fair Value How to value these derivatives is described below. Initiation commitments for mortgages and other types of loans held for investment are usually not derivative. Therefore, institutions should choose to account for these debts at fair value.

Initial assessment of IRLCS

The value of loans to domestic institutions is based on several components, including:

The loan amount

The interest rate

The price at which the loan can be sold

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. In fact, we believe that most institutions will block investors when they block mortgage-seeking applicants, and prices should be high in the market based on the same prices available to investors representing the first market to evaluate the IRLC. Paragraphs 820-10-50-2, FASB ASC, also establish a fair value hierarchy for reporting. The classification structure executes the quality and reliability of the information used to determine the fair value, with level 1 being the most accurate and level 3 being the most reliable. The levels are:

Stage 1 – the market price of the same asset or liability in an active market;

Stage 2 Market Entry Except for volatile entry confirmed by Level 1 values ​​or market data

Stage 3 – Unstable entry has not been confirmed with visible market data; valuation hypotheses based on the best estimate made by market share regulator hypotheses.

We believe that blocking investor prices is a level 2 entry because the value of the derivative is based on the price that can be seen in the market.

IRLCA Assessment

This is an example of an IRLC assessment based on these assumptions:

• The loan amount is $ 100,000
• Borrower price or blocking price 100
• Blocked interest rate 4.125%
• Initial market interest rate 4.125%
• Price starts at 101.50 – maintains maintenance and is locked by investors
• Service value is 1.00%
• Creative projects worth $ 1,000 or 1.00%

The original institution therefore expects a profit of $ 1,500 or 1.50% (101.50 {selling price} + 1.00 {value of services} – 100.0 {borrower price – 1.00 {estimated generation cost}). The table below shows the change in IRLC value based on market interest rate and the percentage that is calculated over time. Yellow difference. As the example shows, the price of the IRLC will change as market interest rates change and the pullback is predicted due to new developments in the credit situation. Basically, there are four things to consider when looking at recent changes in real estate.

• The estimated purchase price of the loan is based on changes in market interest rates
• The translation is predicted – perhaps IRLC will create a home loan
• Deny the validity of the applicant’s options due to the passage of time
• Base prices are based on the concept of market price movements (level 3 input).

Annual Reports for IRLCS

An example is shown above. Changes in interest rates may affect service asset securities and loan value. In addition, marketing withdrawals can be difficult. Thoughts on the introduction of appropriate interest rates in relation to the basic flow, current market mortgage rates and interest included in the IRLC, the reason for the mortgage (purchase and re-financing), the stage of completion of the initial application and registration process, and time remaining until IRLC. We believe that these possible options are level 3. To determine the trading time in an option, one must calculate the market price based on the dates in the IRLC at the end of the reporting period. For example, if an organization binds itself to a lender for 60 days on January 1 and counts the IRLC exchange rate as of January 31, the market value should be based on lock 30-day and non-lock 60-day. This is important to take into account exchange risk. (Usually, contracts with short locks have a higher price tag than long locks because the buyer may change the market interest rates over time.). We further note that employers should determine the risk of non-performance of their assets as RLC figures based on the risk of the facility itself.

IRLCS Account

Changes in the fair value of the IRLC must be measured and disclosed in the financial statements and management records. The carrying amount of the IRLC, based on its value, should be adjusted as the loan amount. These funds are not deducted in accordance with FASB section ASC 948-310-25-3 (Financial Assistance – Financial Assistance). Thus, the amount of IRLC at closing directly affects the increase (loss) verified on the sale of the loan. In the initial introduction, the starting price was not reduced. As with any change in the amount of the IRLC, the cost is calculated based on the loan-based adjustment at the time of closing.