In a feature in the very first issue of HousingWire Magazine, out this week, 15-year MBS/ABS veteran Linda Lowell tackles the question that’s on most mortgage participants mind: is mortgage securitization dead? The complex answer to this question may very well lie with the Financial Accounting Standards Board and its coming proposals that will modify two separate but related standards that govern off-balance sheet securitization.
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In plain English, much of the securitization model that has fueled the modern mortgage market is tied to what’s known as a Qualifying Special Purpose Entity — or QSPE for short, and often called “the Q” in industry slang. QPSEs receive off-balance sheet treatment, or “sale accounting” treatment, that has largely enabled much of the growth in modern secondary markets.
In the acronym soup that’s been confronting investors since the mortgage and credit mess began, perhaps none will end up more critical than the QSPE — that’s qualifying special purpose entity, a concept borne of accounting rules that allow banks and financial institutions to keep certain assets off of their balance sheets. Like MBS/ABS, for example.
It doesn’t take much to knock a company’s stock into the abyss in this sort of unsure financial market — witness the fate Monday afternoon of twin government-sponsored entities Fannie Mae [stock FNM][/stock] and Freddie Mac [stock FRE][/stock] as the latest case studies in what is clearly an increasingly jittery market. Shares in both GSEs were clobbered Monday largely after a warning from a Lehman Brothers Holdings Inc. [stock LEH][/stock] said that both GSEs would need to raise as much as $75 billion in fresh capital.
In clarification that market participants said will further embolden servicers to modify mortgages that are likely headed for trouble, the Internal Revenue Service on Monday outlined the tax effects on securitized mortgages that have been modified to avoid foreclosures. Under Revenue Procedure 2008-28, the IRS said that it will not challenge the tax status of securitization vehicles when a servicer modifies a loan — even a performing loan — so long as the modification fits within the new scope outlined by the government agency.
It turns out that perhaps the single most powerful arbiter of industry reform isn’t on Capitol Hill or in the halls of state legislature, doesn’t sit on the Fed’s board of governors, doesn’t work for the Treasury, and isn’t with the Securities and Exchange Commission. It’s none other than — drum roll, please — the Financial Accounting Standards Board.
The Securities and Exchange Commission has given a green light to the subprime ARM rate freeze, saying that “fast-tracked” loan modifications under the HOPE NOW plan won’t jeopardize the status of mortgage securitization trusts. The SEC’s Office of the Chief Accountant said in a Jan. 8 letter that the agency would not object to the plan, but that it wants more details from banks and others about loan modifications in regulatory filings.