On September 23, 2026, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU), Transfers and Servicing—Servicing Assets and Liabilities (Subtopic 860-50): Mortgage Servicing Rights—Recapture, aimed at addressing diversity in practice surrounding the valuation of residential mortgage servicing rights (MSRs). The proposal would clarify that the value attributable to a servicer’s ability to recapture borrowers through refinancing activities must be included in the fair value measurement of residential MSRs.
While the proposal is narrow in scope, it could have meaningful implications for mortgage servicers, community banks, mortgage banking operations, valuation specialists, auditors, and financial statement users. The amendments are designed to align GAAP measurements more closely with market participant assumptions and improve comparability across entities.
Background: Recapture Rights & MSR Valuation
Under current ASC 860, servicing assets and liabilities are initially recognized at fair value and subsequently measured using either:
- The fair value method, with changes recognized through earnings, or
- The amortization method, with impairment testing performed each reporting period.
A longstanding area of diversity relates to “recapture” rights. Recapture generally refers to a servicer’s ability to refinance an existing borrower and retain servicing on the replacement loan. In practice, market participants often assign significant value to this ability because it allows servicers to preserve economic value that otherwise would be lost when loans prepay.
Despite the economic significance of recapture, existing GAAP does not explicitly address whether recapture value should be included when measuring a residential MSR. As a result, some entities exclude recapture entirely, some incorporate it explicitly within valuation models, and others reflect it indirectly through adjustments to assumptions such as prepayment speeds. This lack of consistency has led to concerns regarding comparability and transparency.
What the Proposed ASU Would Change
The proposed ASU would establish that a residential MSR and the associated recapture rights represent a single unit of account. Accordingly, entities would be required to include all rights and obligations associated with the servicing contract when determining fair value, including the ability to solicit existing borrowers for refinancing opportunities.
The proposal would add new guidance to ASC 860-50 stating that when measuring a servicing asset or liability related to a residential mortgage loan, an entity must include all rights and obligations embedded within the servicing contract unless those rights are separately recognized under other GAAP requirements.
Alignment with Fair Value Principles
One notable aspect of the proposal is that the FASB intentionally declined to define “recapture.” Instead, the Board emphasized that residential MSRs should be measured using the existing fair value framework in ASC 820, which requires entities to consider assumptions that market participants would use when pricing an asset.
This decision reinforces a principles-based valuation approach. Rather than prescribing specific cash flows or valuation techniques, the proposal effectively directs entities to evaluate what a marketplace participant would pay for a residential MSR and to incorporate all economically relevant rights reflected in that pricing.
For many institutions, this may already be consistent with existing valuation practices. However, those currently excluding recapture from fair value measurements may need to revise assumptions, valuation models, and supporting documentation.
Impact on Institutions Using the Fair Value Method
Entities that apply the fair value method to residential MSRs may experience the most direct impact from the proposal.
Under the proposed guidance, fair value measurements would need to capture the economic benefit associated with borrower retention and refinancing opportunities. Depending on existing practices, this could result in higher reported MSR values, particularly during periods in which refinancing activity is expected to be significant.
Valuation specialists may need to revisit assumptions related to refinancing behavior, borrower retention rates, recapture success rates, interest rate sensitivity, and expected life of servicing portfolios.
Institutions relying on third-party valuations should also engage with valuation providers early to understand whether methodology changes may be required. From an audit perspective, management’s controls over model governance, assumption development, and review processes may warrant reassessment.
Impact on Institutions Using the Amortization Method
The proposal also affects entities that subsequently account for MSRs using the amortization method, though in a more limited manner.
The FASB specifically decided not to modify the existing amortization guidance. As a result, entities would continue to exclude expected servicing income from future refinanced loans when determining amortization of an existing MSR.
However, because impairment testing under the amortization method relies on fair value, the proposed inclusion of recapture could influence impairment analyses. In many cases, inclusion of recapture may increase fair value and reduce the likelihood or magnitude of impairment charges. The Board noted that it expects relatively limited impairment impacts upon adoption because many entities already reflect recapture in some form and because recapture generally increases MSR values.
No New Disclosure Requirements
Despite requests from some stakeholders, the proposal does not introduce new recurring disclosure requirements.
Transition & Adoption
The proposed ASU would be applied using a modified prospective approach. Upon adoption:
- MSRs measured using the fair value method would be remeasured under the new guidance as of the beginning of the adoption period.
- MSRs measured under the amortization method would be evaluated for impairment using the new fair value framework.
- Any resulting adjustment would be recorded through opening retained earnings.
The effective date has not yet been determined. Comments on the proposal are due to the FASB by November 9, 2026. Early adoption would be permitted.
Looking Ahead
For community banks, mortgage banks, and other institutions with significant servicing portfolios, now may be an appropriate time to evaluate current valuation methodologies and discuss potential impacts with internal accounting personnel, valuation specialists, and audit advisors. Institutions that currently exclude recapture from MSR valuations may find the proposal particularly relevant, while those already incorporating recapture into fair value measurements may experience little operational disruption if the guidance is finalized substantially as proposed.
If you have any questions, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
