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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

 
 
Nov 3

Written by: Jack Ciesielski
11/3/2008 8:23 AM 

No trick, maybe all treat for financially distressed homeowners. On Halloween, news spread that JP Morgan Chase would work with homeowners holding about $70 billion of mortgages. While JP Morgan Chase didn't step into the subprime swamp when it was percolating, it inherited a large number of subprime loans from its acquisition of Washington Mutual - who wasn't shy at all about making bad loans.

Terrific idea - keep the loans whole, build customer loyalty, keep people in their houses and just maybe, help stabilize the real estate market. In short, do what you can to keep the economy going.

Investors can't help but wonder, though: what are the economic effects on the bank? They're going to give up something to keep the consumers whole. And you have to wonder about the effects that renegotiation may have on the status of any of those loans securitized by WaMu. While it's not a black-and-white area of securitization accounting in Statement 140, a renegotiation of loans in a securitization trust could be considered evidence that a genuine sale of loans never took place. To present a true picture of what exists, the sale would best be reversed with the loans being returned to the bank's balance sheet and the pass-through security being a part of the bank's debt.

There's a bye given by the SEC to such renegotiations however, from the Office of the Chief Accountant early in 2008. No need to worry about shareholder presentation of events as they exist; just move along folks, nothing to see here.

Nothing indicating yet that this is the route JP Morgan Chase is taking. It's noteworthy, though, if they spark a wave of renegotiations among other banks. One would hope that happens - but investors need to exercise skepticism about the genuineness of loan sales in securitizations. In any case, if the additional securitization disclosures proposed by the FASB for this year come to pass, investors would be best off by using them to estimate what leverage would look like in the absence of securitization sale accounting - whether or not there have been loan renegotiations.

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