Four key takeaways from the 2020 Mortgage Bankers AFM Conference

We recently attended the MBA LIVE - Accounting and Financial Management Conference, held by the Mortgage Bankers Association (MBA). Industry hot topics were presented and discussed, including an Ask the Auditors panel featuring Plante Moran Partner Kevin Conte, as a panelist. We’ve summarized our key takeaways below:

Mortgage market outlook

• Prevailing wisdom on the economy and communications from the Federal Reserve indicate that rates will remain at historically lower levels through 2023. MBA’s chief economist currently estimates rates increasing approximately 30 basis points (bps) year-to-year.
• Refinances are expected to slow by mid-2021, while industry experts expect purchase origination volumes to be at all-time highs in 2021, perhaps tempered by the lingering economic effects of the COVID-19 pandemic.
• The Q3 2020 MBA Performance Report showed a continuation of unparalleled earnings-per-loan for retail lenders through September 2020. While the net production profits are expected to decrease in 2021, it should still be a strong year for earnings.
• The following table compares net margins for recent quarters and a retrospective look at Q3 of 2015 to illustrate that margins have been relatively stable in the industry for years. The MBA noted that the net margins in Q2 and Q3 were the highest margins ever since they started tracking this information, which relies on voluntary reporting, by mostly private companies.

Q3 2020	Q2 2020	Q1 2020	Q4 2019	Q3 2019	Q3 2015
203 bps	166 bps	64 bps	50 bps	79 bps	61 bps

Ginnie Mae removal of accounts provision

• Due to the number of borrowers requesting forbearance in 2020, delinquencies over 90 days past due in issuers’ servicing portfolios have increased significantly. Many of the conference sessions discussed the proper accounting treatment as it relates to the issuer call option for these loans (governed by ASC 860).
• In discussions with the FASB during the year to clarify the standard, including what constitutes a “more than trivial benefit,” FASB staff indicated, even for nonpublic independent mortgage bankers (IMBs), the “more than trivial benefit” is a very low bar, and the buyback option at a fixed and determinable price meets this criterion.
• The accounting impact of this provision doesn’t rely on an issuer’s intent to buy these loans back. As such, the issuer should strongly consider recording these delinquent loans at fair value as assets with an offsetting liability. This is the treatment commonly expected across the industry for all GNMA Issuers.

Regulatory update

• The Federal Housing Finance Agency (FHFA) is in the process of formulating a new proposal to update existing net worth and liquidity requirements, which is expected to raise existing agency requirements and bifurcate between GSE and Ginnie Mae portions. This could happen before year-end or Q1 2021.
• LIBOR rate reform was updated on Nov. 30, 2020, when regulators announced LIBOR is extended through June 30, 2023. Although the FASB ASU 2020-04 provides transition relief through 2022, FASB is expected to extend that period to align with the regulators.
  • It was emphasized that any new adjustable-rate loan production should NOT be underwritten based on LIBOR, but the extension helps provide relief on servicing legacy loans.
• Regarding emerging issues in counterparty risk, agency leaders advised IMBs to focus on liquidity strategies now, while margins and volumes are at all-time highs. As rates increase and volumes eventually decline, the agencies also remind lenders to be careful not to compromise underwriting standards in attempts to maintain business levels.

The MBA IRLC Accounting Initiative

• The MBA has plans to publish a white paper in 2021 on the proper accounting for interest rate lock commitments (IRLCs). The goal is to provide a roadmap for the industry to reduce perceived diversity in practice, including guidance on consideration of direct origination costs.