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Servicers Ask For Guidance

Servicers, lenders and others involved in the securitization of subprime loans are turning to the Financial Accounting Standards Board for guidance on what is permissible in modifying and restructuring residential mortgages that are headed for default.

The general consensus within the industry is that servicers have a lot of latitude in helping borrowers avoid foreclosure under FAS 140.

However, failure to comply with the accounting standards governing mortgage trusts or "qualified special purpose entities," can force a repurchase of loans from the trust.

To avoid such a penalty, various interests involved in subprime securitizations have sent the FASB position papers and inquiries about troubled debt restructurings.

So FASB staff has arranged for a closed-door meeting on June 22 for the various parties to discuss their concerns with two FASB board members present.

No decisions will be made at this meeting, according to FASB project manager Patricia Donoghue.

She stressed that the meeting is "educational" so the staff has a better understanding of the restructuring issues when it comes to advising the board members.

"Based on that information, the staff will advise the board as to whether or not it is necessary for the board to take any action in the short term," Ms. Donoghue said.

Representatives from the banking agencies, the Securities and Exchange Commission, Internal Revenue Service, the big four accounting firms and the mortgage industry are invited to the June 22 meeting.

The Mortgage Bankers Association sent a position paper to the FASB on May 25 that concludes restructurings and loan workouts are permissible under FAS 140 in cases where a loan is in default or default is reasonably foreseeable.

In the MBA's view, a servicer can be pro-active and initiate contact with a borrower who is expected to get into trouble when the ARM resets.

However, the servicer must contact the borrower and confirm the circumstances.

"A decision to restructure would not be made until the borrower confirms they will be unable to make mortgage payments and they provide evidence to their assertion," the MBA paper says.

MBA senior director Alison Utermohlen welcomed the FASB's decision to hold the meeting.

"I think that is a fair indication that they intend to respond in some form or fashion," she said.

The FASB project manager noted the board wants to be responsive and feels it has an obligation to make sure they understand the implications of restructuring issues.

But she noted that the FASB is a standard-setting board. "It is not clear to us that any change is needed at this point."

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