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Discussion of “The financial reporting of fair value based on managerial inputs versus market inputs: evidence from mortgage servicing rights”


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.

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Fig. 1
Fig. 2


  1. For example, the largest purchasers of mortgages are the government-sponsored entities such as Fannie Mae and Freddie Mac that have not historically shown an interest in servicing loans.

  2. Data for Fig. 1 represents the fair value of MSRs obtained from bank holding companies’ Y-9C reports (BHCK 6438). Admittedly, this does not capture the entire market for these rights as some MSRs are held by non-bank holding companies. However, the percentage of the MSR market held by these non-bank holding companies during 2008–2011 (the sample period of Altamuro and Zhang 2013) is believed to be <20 % of the total market.

  3. The five servicers with the largest MSR assets recorded as of March 31, 2008, were (1) Wells Fargo & Company, (2) JPMorgan Chase & Co., (3) Citigroup Inc., (4) Bank of America Corporation, and (5) National City Corporation. As of Dec. 31, 2011, Ally Financial had become the fifth largest servicer, and National City Corporation had been acquired by PNC Financial Services and was listed as the sixth largest servicer.

  4. As noted in Sect. 2 of Altamuro and Zhang, banks are permitted to make a onetime election to account for MSRs at fair value rather than the lower of amortized cost or fair value. However, Table 1 of their paper illustrates that a minority of banks had elected the fair value accounting treatment during their sample period.

  5. Note that SFAS 157:22 requires that the level classification in its entirety is determined based on the lowest level input that is significant to the fair value measurement. Thus, to obtain Level 2 status, a servicer must be able to observe each of the significant inputs in the valuation model.

  6. The MBA noted in its National Mortgage Servicing Conference & Expo in 2012 that MSRs do not have a price discovery process associated with them and are thus most representative of Level 3 assets.

  7. Data for Fig. 2 was obtained from the FHFA website at:


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We would like to thank Jennifer Altamuro, Helen Zhang, James Scarborough, and Matt Streadbeck for their assistance with the preparation of the discussion. In addition, we would like to thank Patty Dechow (editor), Richard Sloan, and participants at the 2012 Review of Accounting Conference.

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Correspondence to Catherine Shakespeare.

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Hendricks, B.E., Shakespeare, C. Discussion of “The financial reporting of fair value based on managerial inputs versus market inputs: evidence from mortgage servicing rights”. Rev Account Stud 18, 859–867 (2013).

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  • Mortgage servicing rights
  • Fair value
  • Market inputs
  • Managerial inputs
  • FAS 157
  • ASC 820

JEL Classification

  • G21
  • M41