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. At issue was industry concern that performing so-called "fast-tracked" loan modifications to a large number of borrowers -- as proposed under the rate-freeze plan -- may potentially put securitization trusts in jeopardy. Most securitization trusts take the form of a qualified special purpose entity, or QSPE, for accounting purposes; maintaining QSPE status requires that servicers only modify loans when a default is "reasonably foreseeable," according to earlier SEC clarification of FASB 140 (the accounting rule that governs treatment of QSPEs). Servicers and secondary market participants alike had expressed concern that "fast-tracking" may violate the SEC's interpretation of FASB 140, in that servicers wouldn't be performing a loan-by-loan analysis to determine if default is "reasonably foreseeable" in each case -- which may have put the QSPE status in doubt for those securitized trusts holding modified loans under the program. From the SEC's letter:
OCA has read the ASF framework and has concluded that it will not object to continued status as a QSPE if ... subprime ARM loans are modified pursuant to the specific screening criteria in the ASF Framework. Additionally, given the unique nature of the contemplated modifications and other loss mitigation activities that are recommended in the ASF Framework, OCA expects registrants to provide sufficient disclosures in filings with the Commission regarding the impact that the ASF Framework has had on QSPEs that hold subprime ARM loans.
The SEC said that its guidance should be considered interim, pending a formal update to FASB 140 by the accounting standards board. The SEC said it has asked FASB to issue an update by the end of the year.