A major banking trade group, The Mortgage Bankers Association, is voting today via teleconference on whether to lobby the Financial Accounting Standards Board on an issue that could restrict banks’ ability to use a hedge prevalent in the mortgage lending arena.

The group failed to reach an consensus Feb. 25 on which issues stemming from FAS 133–the new standard to account for derivatives–to lobby the standard setter about, and will discuss the numerous issues in the next month or so. However, the 50-or-so representatives did decide to hold a teleconference meeting today to decide on the immediate fate of one issue: accounting for a combination of options used to hedge some market risk, especially mortgage servicing.

The issue first arose when the Derivatives Implementation Group (DIG)–a consortium of accounting experts mandated to analyze conflicts in FAS 133 and provide possible solutions–tentatively decided in January that a combination of options can only be designated a net-purchase option if it meets four strict criteria. Net-purchases receive hedge accounting treatment under the general rules laid out in the standard. DIG’s decisions are subject to approval by the Financial Accounting Standards Board, which has yet to address the option combination issue.

Due to the nature of mortgage banking, according to Allison Utermohlen, senior director of accounting and tax policy at the MBA, most mortgage lenders using the instruments to hedge risk would be unlikely to meet the four criteria, and so would have to designate the option combination as a net-written option. Such designations can only accounted for as hedges under very specific and limited circumstances, Utermohlen said, meaning many mortgage lenders would be unable to use what has proven to be an effective hedging strategy.

"Combinations of options are often used to hedge servicing rights, deemed to be one of the most cost-effective ways of hedging servicing. Given DIG’s consensus, some mortgage lenders won’t qualify."

Utermohlen said the MBA would likely have a letter ready to send to FASB on the issue a week after any decision. The combination option issue is one of many issues the MBA is concerned about–including the definition of a hedged portfolio and measuring the effectiveness of hedges– and may seek to lobby FASB into providing clarification or some relief.