MBA, CMSA Urge Capital Relief under New Accountancy Rules
The Commercial Mortgage Securities Association (CMSA) and Mortgage Bankers Association (MBA) sent a comment letter this week to banking regulators, requesting capital requirement relief for certain structured finance products under new accounting rules set to go into effect in 2010. The joint letter -- filed at the Federal Reserve, Federal Deposit Insurance Corp. (FDIC), Office of Thrift Supervision (OTS) and Office of the Comptroller of the Currency (OCC) -- addresses proposed risk-based capital treatment of residential and commercial mortgage assets backing private-label securitizations. The letter (available to download here) raises industry concerns over the Financial Accounting Standards (FAS) 166 and 167, which were drafted by the Financial Accounting Standards Board (FASB) in June. The proposed changes take effect Jan. 1, 2010 and will require assets and liabilities of special purpose entities (SPEs) like mortgage-backed securities (MBS) to come onto the balance sheet of the issuer, servicer or special servicer. The standards will immediately apply to all existing MBS and commercial MBS, as well new MBS and CMBS issued after January 1. “FAS 166 and FAS 167 will require hundreds of billions of dollars of assets to come onto the banks’ balance sheets on Jan. 1, 2010,” said John Courson, MBA’s president and CEO, in a statement. “These assets would immediately require an allocation of capital under the regulatory capital rules proposed. Coming at a time when regulatory capital is already a scarce resource, it may hinder the current economic recovery underway.” The regulatory agencies that use the generally accepted accounting principles (GAAP) like FAS 166 and 167 as a baseline for assessing regulatory capital requirements will not grant relief for these assets and liabilities, the letter said. Forcing banks to account for these assets and liabilities essentially overnight on January 1 would present a significant financial burden if capital requirements are not loosened. The CMSA and MBA recommended the regulators grant capital relief if a security meets certain structures. In cases where the transferor acts as primary beneficiary, capital relief should be granted if the transfer meets all other criteria for sale accounting under FAS 166. Relief should also be granted in cases where the beneficial interest holders of the affected variable interest entity (VIE) have no recourse to the general credit of the primary beneficiary, and in cases where the VIE's assets can only be used to settle the VIE's obligations, the joint letter said. The CMSA and MBA also called for capital relief in situations where no explicit arrangements or implicit variable interests exist that provide financial support to the VIE. Servicing advances should not be counted as such an arrangement or interest, as advances are required only if the servicer determines them to be collectible, the letter added. Write to Diana Golobay.