SFAS 140: Worth Your Sunday Read

Sure, you could read the majors today over your morning coffee and get the same story about Johnny Homeowner who really wants to sell his house or make his mortgage payment but just can’t because that payment just got too big too quickly. You could.

Or you could read this - and watch a blogger lose a gasket over SFAS 140.

(I’d say it’s like watching Cramer go postal, but I can’t, because Tanta over at Calculated Risk actually knows what she’s ranting about.)

What is SFAS 140, you ask? It’s an accounting standard that governs (in part) off-balance-sheet securitizations. And there are some people that have questioned the application of said standard in mortgage banking, particularly as it relates to servicing mortgage loans:

If you had to list the culprits for the subprime-mortgage mess, the Financial Accounting Standards Board would be a good place to start. Under its rules, lenders that sell blocks of loans to certain types of off-balance-sheet trusts are allowed to take the loans off their books and record immediate profits. Often, the gains are permitted even if the lenders still bear risks of losses on the loans, and even if they still hold influence over the trusts’ activities.

My own take on this is to wonder why the hullabaloo? — there are, after all, real examples of servicing operations that aren’t arm’s length from the issuer/trustee but are vastly removed from whomever actually originated the loans. Take Select Portfolio Servicing for example - owned by Credit Suisse, it doesn’t originate any of the product it services.

Let’s assume for a minute that the whole industry applied this sort of model: that would mean lenders would book gain-on-sale “cleanly,” while servicing rights went to whatever captive servicer was owned by the Wall Street bank that played issuer.

Doesn’t it all seem more than a little inane, then, to be complaining about SFAS 140, characterizing it as the “crack cocaine” that put New Century and other lenders out of business? After all, there’s something to be said about owning the servicing rights when you sit in the first loss position — and regardless of whatever has been booked as gain-on-sale, SFAS 140 doesn’t change the fact that residual interests do remain on the originating party’s balance sheet.