Tanta,

Well isn't that part of how this whole mess came to be - the "Gimme a AAA with junk bond yield" delusional investor?

bacon- that report is kind of fluffy, dontcha think? The only thing that remotely seemed remarkable is that since 2005 the Interwebs have become twice as popular as a 'souce of information for avoiding default' among non-defaulters and defaulters alike.

I doubt if any of them are coming to CR, but just in case, maybe a public service UberNerdesque post would be in order.

In tommorrow's issue of IMF, there is a very interesting bit (pg.6) on ASF wanting to loosen FHASecure. At risk of having that Cecala, guy come and hang me upside down until the last fig newton drops from my pockets, I will only say that a whopping 417 loans rate-reset-related were done in the last four months of 07. If I'm reading that right - what's your take, bacon?

I am sorry, but I do not understand the outrage here...

Weil's beef is not with whether the servicers are "wind-up toys", or whether they can make modifications. His beef is with the off-balance-sheet accounting treatment if those modifications are allowed.

If something generates earnings like an asset and losses like a liability, why the heck is it not on the balance sheet in the first place?

Put another way, if the original justification for allowing them off balance sheets was that they are just "clockwork", and it turns out they are not clockwork after all, shouldn't they be brought back on? As far as I can see, that is Weil's point. It has nothing to do with whether mortgages SHOULD be treated as clockwork; only how they should be accounted for.

Incidentally, weren't all these "off-balance-sheet" entities one of the primary enabling mechanisms for the entire crisis?

Mortgage modifications too slow, FDIC's chief says - MarketWatch

WASHINGTON (MarketWatch) -- The mortgage industry is moving too slowly on modifying loans under risk of default, said Sheila Bair, chairman of the Federal Deposit Insurance Corp. in congressional testimony Thursday. Bair said credit problems are developing outside the subprime sector, and urged regulators and the industry to work quickly to develop programs to modify Alt-A and prime nontraditional loans. With prices falling and credit tightening, "hundreds of thousands of additional mortgage foreclosures" could be seen in the next few years. Lenders and homeowners alike might be better served by forgiving part of the debt, she said.

Speaking of actually thinking about loans, have you seen this news on FAS 114? It looks like the banks are actually going to have to address impairment on their loans! What a concept.

FASB Rebuffs Mortgage Bankers Request
For Relief From Statement 114 Standards

The Financial Accounting Standards Board Jan. 30 refused to add a future agenda item to consider allowing the mortgage banking industry to report troubled loans under Statement of Financial Accounting Standard 5, Accounting for Contingencies, rather than Statement 114, Accounting by Creditors for Impairment of a Loan.
The Mortgage Bankers Association asked FASB for help in addressing "the likelihood that hundreds of thousands of mortgage loans might need to be modified over the next two years" because of fallout from the subprime mortgage market meltdown.

FASB staff recommended against adding the project to its agenda. The board members agreed with its staff's assertion that FAS 114's guidance is clear regarding the required accounting treatment for troubled debt restructuring (TDR) for all loans, including smaller-balance homogeneous loans, such as those bundled in mortgage-backed securities.

The board was concerned that because most of these TDRs will be worked out by interest rate modifications, "which would not necessarily be captured under a Statement 5 approach," according to FASB staff, no losses would be recognized.

The FASB board agreed that allowing investors to evaluate the magnitude of a lenders' losses related to TDRs is the paramount consideration and that Statement 114 provides that disclosure, while Statement 5 does not.

"In my reading, Statement 114 appropriately addresses the type of loan restructurings that will take place," said FASB member George Batavik.

FAS 114 is "very clear when a lender adds a concession ... that a loss recognition threshold has been triggered," board member Leslie Seidman said. Statement 114 also "is explicit that the only loans that are scoped out are those at fair value."

FAS 114 in effect would require the use of discounted cash flow techniques in evaluating TDRs, and "most companies that have shared their views with MBA state they simply do not have the systems capability to measure impairments of modified smaller balance residential mortgage loans using a discounted cash flow approach," MBA's Dec. 5 letter said.

FASB was unsympathetic to this problem, with members saying lenders should have systems in place to record the terms of the loan from "day-one." The board suggested MBA seek relief in this area from the SEC or banking regulators.

A FASB staff member said lenders can evaluate impairment of debt under FAS 114 either on a loan-by-loan basis or aggregated, although to date lenders applying FAS 114 have not measured impairments on an aggregated basis.

FASB Notes Exemptions From FAS 140

The board also mentioned that the mortgage banking industry already had been granted some exemptions from FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, by SEC's Chief Accountant Conrad Hewitt, who said in a Jan. 8 letter that his office would "not object" to mortgage servicers modifying terms of loans to avoid default. The board agreed the industry did not need further relief from FASB standards at this time.
FASB staff also noted in its recommendation against the MBA request that MBA was seeking relief from FAS 114, which has been in effect since January 1995, not only for previously originated loans that were intended to be sold in secondary markets, but also for loans currently being originated. "Lenders should consider the costs to comply with Statement 114's requirements when continuing to offer teaser-rate loan programs," the FASB staff report concluded.

Finally, the staff pointed out that allowing lenders to use FAS 5 would create another divergence between U.S. generally accepted accounting principles and international financial reporting standards.

A meeting handout prepared by FASB staff is available at http://www.fasb.org/board_handouts/01-30-08.pdf.

By Lyda Phillips

Tanta --

Weil's assumption has to be that if the servicer took these things onto the balance sheet, that would be disadvantageous to them.

I'm sorry, but I did not think this discussion had anything to do with the servicers' balance sheets. I thought it had to do with the issuers' balance sheets.

As I understand it, the lenders set up these QSPEs to buy the mortgages, allow the lender to record a "gain on sale", and move them off of the balance sheet. As "Anonymous" said, the accounting rules allowed this because the QSPEs supposedly operate like "clockwork". And now, the SEC is "interpreting" the rules to allow the same treatment even if it is not clockwork anymore.

As far as I can tell, this is also Weil's entire point. What are he (and I) missing?

FBI targets senior bankers in far-reaching sub-prime fraud inquiry - Times Online

“America's Federal Bureau of Investigation is investigating senior banking executives for insider dealing and fraud as part of a criminal inquiry into the sub-prime crisis, the agent leading the inquiry said yesterday.”

“Bond insurers are among the other targets of litigation. These firms, which guarantee the payment of interest and principal of the bonds they underwrite in the event of a default, stand accused of failing to inform their investors of the true extent of the dangers posed by the sub-prime securities they insured.”

So what does a Servicer do if the borrower has no interest in a Mod? How is this captured in a risk assessment of any pool? Does it simply run the standard course of events?

What we have seen is that some borrowers can not be found. And, some just dont care because they are upside down. My take is relying on foreclosure figures as an indication of macro economic health is no longer so valid.

yes, Shnaps, i believe you read that correctly.

I thought I read the 417 right - I just wanted your take on the relative safety of my fig newtons.

One might conclude that the FHA has not done dilly poo thus far. Here is a link (anyone can pay-per-view it for 50 bucks). Or just wait for a related post to appear on CR. cough

Tanta, I must say your patience truly is inhuman. Superhuman. Incredible, and beyond my very human patience.

I did get a good laugh out of the idea that anyone would draw up a PSA saying that the servicer couldn't modify any loans. To the best of my knowledge, this is one piece of stupidity that no one ever has committed. If anyone ever did, my guess is that the end investors might have a successful lawsuit on their hands!

To everyone that darkly suspects that Weil has a legitimate point here, somehow, I think you need to check your meds and stop listening to those voices. I truly and sincerely do not mean to be rude, but please think about the connotations of what you are alleging. If it were not for servicer's expertise and ability to handle problem loans, there would be no need to pay fees that range from .5% to .125%. Handling the loan payments could be done far more cheaply by contracting it out to a utility company.

But loans aren't electric bills, and it is far more expensive and complicated to either foreclose or figure out if it is cheaper to modify than to cut off electric service, and in fact, even utility companies do work out forbearances and modifications. THINK ABOUT IT.

I saw the article but I thought it wouldn't fool anyone.

All right, which one of these commenters is Weil?

I'm sorta busy today, but still addicted to the blog. I read Weil's article quickly. From an accounting standpoint, I don't really see what the point is.
If you don't like that fact that VIE's exist, sorry. VIE's were intended to take out ventures not core to business, so the ongoing part of the business is the focus of readers. Lama's opinion is that VIE's should be in separate columns to the right of the core business with the total of core and VIE's to the far left, next to the descriptions...but nobody asked me what I thought.
If you think modifications of loans within reasonable terms requires some adjustment on the balance sheet, sorry again.

Thanks for the 'splainin, Tanta.

people-- good, bad and indifferent, lucky and unlucky, high-maintenance and low maintenance.... and ruthless.

RW,
The original intent was to focus attention on the core business. They also can function to mitigate losses on risky ventures (leveraged securities or new technology ventures), because they don't roll up to the parent (once the entity is broke, you just close it).
Then, it took all of 10 minutes for the manipulation to start.