FAS 140 Won't Hurt Lenders

The Financial Accounting Standards Board is still in the process of finalizing revisions to FAS 140 and Interpretation 46, but they are not expected to have much impact on the mortgage industry.

The FASB's Fin 46, consolidation of variable interest entities, addresses the circumstances in which one entity has to be consolidated by another in its financial statements. Last December the FASB issued a revision to Fin 46, which it is calling 46R, to clarify some of the provisions of Interpretation 46 and to exempt some entities from its requirements.

The accounting body came up with the initial proposal for revision of accounting standards in 2002, in response to Enron's manipulation of accounting rules to manage its balance sheet and create off-balance sheet financing.

The various special purpose entities that the energy trader created helped obscure its true financial condition and the company eventually filed for bankruptcy protection. FAS 140 covers situations relating to transfer of assets and when a sale is to be considered a "true sale." Alison Utermohlen, senior director for government affairs with the Mortgage Bankers Association, said that the FASB is considering re-exposing its exposure draft relating to FAS 140 changes in the first or second quarter of 2004.

The intent of the FASB is not to disrupt the agency securitization market, according to Ms. Utermohlen, and they are also "inclined to address our concerns about the private label market."

Last summer, the MBA and the Commercial Mortgage Securities Association had sent in comments in response to the FASB's previous exposure draft for FAS 140. The FASB has been receptive to the trade groups' concerns, according to Ms. Utermohlen, and the new exposure draft seeks to "redeliberate the comments." Fin 46 addresses the circumstances in which one entity has to be consolidated on another's balance sheet.

She doesn't believe that the revision to Fin 46 will have any significant impact on MBA members since they mostly don't have interests in the sort of variable interest entities that are required to be consolidated. However, she noted, "Some of our members do have such relationships that they have had to examine."

Ms. Utermohlen said that the MBA is "concerned about it because you never know if a document could have unintended consequences and we want to make sure that the draft is not detrimental." Also, the accounting standard has been "difficult to understand and implement." Marty Rosenblatt, a partner with Deloitte & Touche, said that revisions to Fin 46 are merely "technical corrections." He too doesn't expect that the revisions will have any effect on the mortgage securitization market since the typical mortgage securitization is done through a qualified special purpose entity that is exempt from the provisions of Fin 46. And while some mortgage warehouse transactions have had to come back on balance sheet as a result of Fin 46, this has had "very little effect," he believes. FAS 140 has been in effect since 1997, according to him.

While the FASB's goal is to make it more difficult to get qualifying special purpose entity status under the standard, "the target is not mortgage assets," he noted. The FASB's earlier exposure draft for revision of the accounting standard was "stringent" and he expects the exposure draft that is slated for release in the first quarter to be more "benign."

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