A Discussion of ‘Financial Reporting of Fair Value Based on Model Inputs versus Market Inputs: Evidence From Mortgage Servicing Rights’

Posted: 6 Nov 2013

See all articles by Bradley E. Hendricks

Bradley E. Hendricks

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Catherine Shakespeare

University of Michigan - Stephen M. Ross School of Business

Date Written: July 17, 2013

Abstract

Contrary to the guidance provided by regulators and industry associations suggesting that mortgage servicing rights (MSRs) be recorded as Level 3 assets, Altamuro and Zhang identify that 25% of banks classify them as Level 2 assets. This variation in the asset classification of a single asset type provides a unique setting to examine the role of inputs in the fair value measurement process. Altamuro and Zhang find that the fair value of MSRs based on managerial inputs (Level 3) better reflects the economics of the underlying assets than the fair value of MSRs based on market inputs (Level 2). This discussion examines the institutional features of the MSR market, particularly the market concentration and the illiquidity of the market that are important when considering this result. The discussion also raises a number of questions about the inputs used in the fair value process and calls for further research on this topic.

Keywords: Mortgage servicing rights, Fair value, Market inputs, Managerial inputs

JEL Classification: G21, M41

Suggested Citation

Hendricks, Bradley E. and Shakespeare, Catherine, A Discussion of ‘Financial Reporting of Fair Value Based on Model Inputs versus Market Inputs: Evidence From Mortgage Servicing Rights’ (July 17, 2013). Review of Accounting Studies, Vol. 18, No. 3, 2013, Available at SSRN: https://ssrn.com/abstract=2349992

Bradley E. Hendricks (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
(919) 962-3619 (Phone)

Catherine Shakespeare

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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