Jonathan Weil at Bloomberg is getting more mileage out of a formerly obscure accounting rule than any financial columnist in recent memory; his latest coup d'état revisits a SEC clarification of the so-called "Q election" used by most securitization trusts. It's only slightly less overstated than his earlier diatribe on FAS 140 that likened its use in securitization trusts to "crack cocaine." Some folks just don't know when to let go, I suppose. Let's at least start with the facts as it relates to his most current bit of misinformation, because what he's reporting is in fact old news. On January 9, HW reported on SEC clarification of FASB 140, designed to green-light so-called "fast-track" loan modifications under the rate-freeze program brokered by the Treasury Department and outlined by the ASF. It's that three-week old interim clarification that sent Weil rocketing off into outer space yesterday, saying that lenders were getting "a huge exemption from the normal rules for off-balance-sheet accounting." Given that the SEC letter provides only interim clarification to a long-standing grey area in "the normal rules," I find it disingenuous -- at best -- for Weil to claim that the SEC's clarification represents an exemption. And he's making essentially the same point he's made since July, all over again:
The accounting standard at issue is FASB Statement No. 140. Its rules had envisioned QSPEs as brain-dead vehicles, akin to wind-up toys. Their actions are supposed to be automatic responses that "were entirely specified in the legal documents that established" the trusts. When servicers do exercise discretion, it must be "significantly limited."
Weil, as best I can tell, has a hard time understanding the concept of loss mitigation altogether. Think of it this way: if servicers did nothing but tell borrowers facing default that nothing could be done until they, in fact, defaulted -- what then? If you think the media din is bad now about how "uncaring" servicers are, you'd have reached a whole new level in the world Weil's got in store for us. And, of course, there's the itty-bitty little problem about investors losing their shirts and their shorts, as well. Tanta unloaded on Weil in July of last year, and what she said then is appropos now:
Oh, I suppose, if you're some perfect righteous Bloomberg columnist investor type, you'd never ever have such a problem and you don't give a rat's patootie about the unwashed masses who might need "judgement exercised" instead of Catch-22. You're free to feel that way, but as far as I'm concerned you're not free to pretend like this is some conspiracy on the part of some crackheads to mess with your NAV. There are huge, massive, deeply important public policy issues around home mortgage lending, which makes it a little bit of a problem to treat mortgages like any other "financial asset." We have entire neighborhoods and communities falling apart because of the Wall Streetization of mortgage finance, and now that someone's trying to deal with the mess, it's not a good time to suggest that we pile on the punishments just so you can figure out how to read a balance sheet.
Bingo. The problem here isn't how servicers approach and account for their loans; it isn't even the fact that the industry is now grappling with how to handle a swarm of loan modifications. It's the fact that some loans were made at all in the first place. If Weil wanted to be righteously indignant over anything, he'd have been better off focusing on what sort of alternate universe led all of us to believe we could originate boatloads of stated-income 2/28s and completely disintermediate the astronomical risk that came with so doing. Or railing against risk management practices that slid to the point that nobody was actually doing any real sort of due diligence prior to issuance of these ticking time bombs. But that would require actually knowing something about the industry you're being paid to cover.