FASB Proposes Updates to Mortgage Servicing Rights Measurement

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Background

Servicing financial assets such as residential mortgage loans includes activities such as collecting payments, monitoring delinquencies, and managing escrowed funds. An MSR represents a contractual right to service an underlying mortgage loan. Recapture is a servicer’s ability to solicit the borrower to refinance that loan and retain the servicing rights on the new loan, allowing the servicer to keep the economic benefit of servicing when the existing loan is prepaid through refinancing.

Accounting Standards Codification (ASC) 860-50 provides guidance on accounting for servicing assets and liabilities that arise from the rights and obligations to service financial assets. Servicing assets that qualify for separate recognition initially are measured at fair value. Subsequently, they are measured using either the fair value method or the amortization method. Under the amortization method, the servicing asset is amortized to net servicing income and assessed for impairment based on fair value at each reporting date.

Current ASC 860-50 guidance does not explicitly state whether the value attributable to recapture should be included when measuring a residential MSR at fair value. This has caused diversity in practice and reduced comparability. For example, recapture generally is included in the initial measurement of an acquired residential MSR based on the transaction price, but it might not be included in the initial measurement of a retained residential MSR. Entities also vary in whether and how they incorporate recapture in subsequent measurements.

In response to stakeholder feedback, the Emerging Issues Task Force (EITF) Agenda Committee added a project to consider how recapture rights should be reflected in the measurement of residential MSRs. The EITF ultimately recommended that the FASB address the issue by treating recapture and a residential MSR as a single unit of account. The FASB agreed and proposed guidance that would require entities to include the effects of recapture when measuring a residential MSR at fair value.

Including recapture in a residential MSR contract’s fair value

The proposed ASU would apply to all entities that recognize residential MSRs under ASC 860-50. When measuring a servicing asset or liability related to a residential mortgage loan at fair value, an entity would be required to include all of the servicer’s rights and obligations associated with the MSR contract, including the effects of recapture, unless those rights or obligations must be recognized separately under other GAAP. This would include servicing assets and service liabilities subsequently measured under the fair value method and the amortization method for the purposes of assessing impairment.

Crowe observation: Under the proposed guidance, entities would continue to apply the guidance in ASC 860-50-25-6 and 25-7 to identify rights to future interest income from the serviced assets that exceed contractually specified servicing fees as such rights might require accounting separate from the residential MSR contract.

Fair value of the MSR contract would be determined under Topic 820, “Fair Value Measurement.” The proposal also would link the term “fair value” in ASC 860-50 to the Topic 820 definition, which defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

The FASB did not propose to define recapture or prescribe specific recapture cash flows. Instead, entities would apply the Topic 820 framework and use market participant assumptions to determine what a market participant would be willing to pay for the MSR contract.

Crowe observation: Entities that currently exclude recapture from residential MSR contract valuations or reflect it indirectly through other assumptions might need to reassess valuation methodologies, model inputs, and related controls to verify they are consistent with how market participants would value the MSR contract.

The proposal would not add new recurring disclosure requirements beyond those already in ASC 860-50 and Topic 820, which provide information relevant for understanding significant inputs and assumptions used to value recapture. With respect to transition, entities would disclose the nature and reason for the change in accounting principle, the method of change, and the cumulative effect on retained earnings.

Effective date and transition

The FASB will determine the effective date of the proposal after evaluating stakeholder comments. Early adoption would be permitted in an interim or annual reporting period in which financial statements have not yet been issued or made available for issuance.

Entities would apply the amendments using a modified prospective approach to all residential MSRs outstanding as of the beginning of the period of adoption. A cumulative-effect adjustment, if applicable, would be recorded to the opening balance of retained earnings or another appropriate component of equity or net assets.

Residential MSRs subsequently accounted for under the fair value measurement method would be remeasured as of the beginning of the period of adoption using fair value determined in accordance with the proposed amendments.

Residential MSRs subsequently accounted for under the amortization method would be evaluated and measured for impairment as of the beginning of the period of adoption using fair value determined in accordance with the proposed amendments. The proposal would not change the existing amortization guidance, which continues to exclude the effects of recapture when determining how to amortize a residential MSR.

Stakeholders have until Nov. 9, 2026, to review and provide comments on the proposed ASU.

FASB materials reprinted with permission. Copyright 2026 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.