FASB Policy May Affect Mortgage M&As

The Financial Accounting Standards Board is expected to issue a statement of position in the next few weeks that would create a new accounting regime for purchased loans that have deteriorated in credit quality, and the SOP is likely to have implications for the acquisition of mortgage companies.The SOP would eliminate allowances for loan losses on purchased loans and require the buyer to record the loan based on expected cash flows. Further deterioration of the loans would trigger loss recognition, while improved cash flows would prompt the buyer to recognize a higher yield. The Securities and Exchange Commission has signaled that the new SOP will be applied to acquisitions of banks and mortgage companies, which would eliminate the creation of allowances for losses by the acquirer. Regarding disclosure, the SOP is designed to give a clearer picture of loan quality and loan performance over time by comparing contractual cash flows with expected cash flows. "We thought that would be useful information for investors -- to be able to get some idea of the quality of the loans you're buying," said Dorsey Baskin, who has been working on the SOP for the past five years. Mr. Baskin is with Grant Thornton in Dallas. Lenders will have a year to implement the changes.