Minor modifiation in SEC accounting rules may hult sub-prime foreclosures
August 11th, 2007
Under current rules of the SEC (Securities and Exchange Commission) once a loan is securitized it must stay off the lenders financial balance sheet and cannot be modified. This rule is regulated by Accounting Rule FAS 140Recent events in the sub-prime mortgage industry have Congress seeking answers from the SEC who is scrabbling to interpret FAS 140. Everyone is hoping SEC interpretation will allow lenders to modify loans if the loan appears in danger of foreclosure Under FAS 140 once a loan is securitized all future earnings of the loan are sold to the trust where they are pooled with similar assets help by the trust. Once the loan proceeds are transferred to a trust the loan cannot be modified until one month after foreclosure occurs. This of course does not help the current situation.Under FAS 140 which governs accounting practices for securitizing loan proceeds, lenders are reluctant to make modifications to loans for fear of SEC rule violation. (Isn’t it nice how the government has placed the fear of god into the business world?)
A letter has been issued by SEC chairman Christopher Cox. In his letter, Cox said that “modifications undertaken when loan default is reasonably foreseeable should be consistent with the nature of modification activities that would have been permitted if a default had occurred.” Conrad Hewitt, the SEC’s chief accountant, explained in an accompanying memorandum that the ability to restructure mortgages when default is foreseeable is “not inconsistent” with the notion of “continued off-balance sheet accounting treatment.”
So, without coming right out and saying so, it appears the SEC will allow modification to loans that appear in danger of default! This is great news, at least for now.
Lenders are now free to modify sub-prime loans and prevent the flood of foreclosures looming on the horizon.
Hopefully, fears will begin to subside and confidence in the mortgage back securities market can be restored in the near future.For more information go to www.deankonstantine.com or www.askdeankonstantine.com
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