SEC letter on accounting effects of subprime loan crisis

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11 Jan 2008

Deloitte & Touche LLP (USA) has published Financial Reporting Alert 08-1 that discusses a Letter to the FEI and AICPA from US SEC Chief Accountant Conrad Hewitt addressing the accounting implications of the American Securitization Forum's Streamlined Foreclosure and Loss Avoidance Framework.

The ASF, coordinating with the US Department of the Treasury, developed the Framework to encourage mortgage loan servicers to refinance or modify classes of adjustable-rate subprime mortgage loans with certain risk characteristics that make them susceptible to default. However, a potential hurdle has been whether the modifications of mortgage loans violate qualifying special-purpose entity (QSPE) status under FASB Statement 140 (see August 29, 2007 Heads Up (PDF 119k) for further background). The SEC's letter indicates that the Commission "will not object to continued status as a QSPE if Segment 2 subprime ARM loans are modified pursuant to the specific screening criteria in the ASF Framework". The letter also states that the "OCA believes that it would be reasonable to conclude that Segment 2 subprime ARM loans are 'reasonably foreseeable' of default in absence of a modification based upon a qualitative consideration of the expectation of defaults".
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