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A US senator, Charles Schumer, has called on accounting firms to help in securitised mortgage investors to reschedule or otherwise modify their loans rather than force them into being foreclosed.
Until recently Financial Accounting Standards Board (FASB) rules for securitisations - mortgages which are packaged together and sold on as bonds backed by the expected loan repayments and which then can be treated as off-balance sheet items – do not allow these to be modified or restated unless they are in default, without then being treated as assets on their balance sheet. This has compounded the global sub-prime lending crisis, resulting in the fall in the US housing market, as sub-prime securitisations – those based on mortgages to borrowers with poor or no credit history – have failed to deliver their repayments and bond holders are unable to offer any flexibility.
However, last month, SEC Chairman Christopher Cox, said that lenders could make modifications without changes to the balance sheet providing the modifications undertaken when a loan default is "reasonably foreseeable" should be consistent with the modification activities that would have been permitted if a default had actually occurred.
The SEC change was seen as a promising solution to the growing sub-prime lending crisis and one that gives investors in those loans more room to negotiate with the end borrowers and avoid foreclosing on their mortgages. But it appears that few investing firms have taken advantage of this change, still believing it would impact the off-balance sheet treatment of the loans. Senator Schumer, in a letter to the big accounting firms last week, has asked them to "assist this country's mortgage crisis by ensuring that your clients are aware of the recent SEC and FASB guidance on FAS 140, and by otherwise encouraging them to modify subprime loans at risk of default."
So far, there has been no response from the auditing firms.
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