The fair value, therefore, is most commonly based upon an estimate of discounted net future cash flows that include assumptions related to future interest rates, future credit losses and future prepayment speed
WHAT’S AHEAD In the recent past many banks followed a business model where they would originate mortgage loans and then pass all or most of the risk to the capital markets. This model is now less popular and will probably never again be utilized to the same degree. However, securitization is by no means dead. The use of securitization allows lenders to give preference over others in relation to specific assets through a bankruptcy-remote entity. The segregation of risk to allow a greater degree of leverage is what the world of finance is all about; it will continue into the future albeit in potentially different forms.
In considering the potential risks that face investors, in , FASB added a new project to its technical agenda to address the transfer of financial assets and propose amendments to Statement no. 140. FASB issued an exposure draft with proposed changes to Statement no. 140 on , seeking comments and also issued three FASB Staff Positions, one in and the most recent in to provide additional guidance (see sidebar “ Relevant GAAP”).
FASB plans to issue an amended exposure draft on FASB Statement no. 140 in the second quarter of 2008 and, along with other considerations, FASB has indicated that it will most likely address the removal of the qualifying special purpose entity (QSPE) concept in favor of a linked-presentation model. The proposed linked presentation model would require secured financings that meet certain specified criteria to present the assets and associated liabilities as linked on the face of the balance sheet with a resulting net position. This new model could potentially have a dramatic effect on the way companies currently account for securitizations.
FASB Statement no. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125,
FASB Staff Position 140-1, Accounting for Accrued Interest Receivable Related to Securitized and Sold Receivables under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
Amendment of FASB Statement No. 140: Project Updates for the Transfers of Financial Assets. Includes a summary of decisions reached, next steps, links to the minutes of previously held board and public meetings and the history and background of the project,
Exposure Draft issued on , Proposed Statement of Financial Accounting Standards Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140,
When the loan is sold or securitized, the proceeds from the disposition are used to repay the warehouse facility
SEC Final Rule: Asset Backed Securities; Release No. 33-8518, effective as of ended rules and forms that address the registration, disclosure and reporting requirements for asset-backed securities under the Securities Act of 1933 and the Securities Exchange Act of 1934,
A warehouse facility is a line of credit extended by a financial institution to fund the purchase or origination of new mortgages. Mortgage banks payday loans Covington rely on these facilities to fund continuing operations during the short period after a loan is originated, usually two to four months, until the mortgage is sold or securitized.
A robust secondary market does not currently exist in which to value the retained interest in the loans held by a company. Net future cash flow equals the interest and prepayment penalties paid by loan holders, less payments to other applicable parties, estimated credit losses, mortgage insurance fees, guarantee fees and trustee fees. In addition, the receipt of such cash flows may be delayed to the extent that the loan sale agreement does not require cash flows to be paid to the company until they exceed certain levels specified in such agreements.
The complexities in estimating the value of multifaceted assets lacking an active secondary market, as well as appreciation for the different ways a company may account for their value, requires that financial managers who utilize this type of financing endeavor to be knowledgeable of and accept the additional financial reporting risk inherent in these transactions. Consideration should be given to using a third-party valuation of these assets or liabilities to bolster the company’s fair value measurements.