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Notes for and valuation of IRLC and MLHS derivatives

Jan 13, 2017 07:23AM MST

Virtually all my lender clients obtain Best Efforts Contracts/Commitments from secondary market investors to effectively eliminate risk related to interest rate risk and related price risk for their Interest Rate Lock Commitments and the mortgage loans they hold for sale. For those client I have had them disclosure in their notes an explanation of this and a note about their loan commitments and contingencies. Until now I have not explicitly had a note stating that their IRLC or MLHS were derivatives. This year I have had one my client's partners inquire about this and request we assist our client in calculating the FMV of their derivative. For my clients who use this strategy with the loans they orignate I have always viewed their IRLC and MLHS as not actually falling within the definition of a derivative and even if so, that the value was immaterial and passed on disclosing this as a derivative. What are you recommending for such lender clients?

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