Financial Accounting


Changes for FASB No. 65

Although the FASB exposed its proposed mortgage amendment for only 45 days, it still received a number of helpful suggestions from the accounting community, some of which were incorporated in the recently released final document. FASB Statement no. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, amends Statement no. 65, Accounting for Certain Mortgage Banking Activities, issued in 1982.

According to Kevin Stoklosa, an assistant project manager at the FASB, the board made three major changes to the ED. The proposed statement broke out retained securities between those held for salewhich would be required to be put in tradingand those not held for salewhich would have the option of being classified as trading, available for sale or held to maturity in accordance with Statement no. 115, Accounting for Certain Investments in Debt and Equity Securities . The board believed any retained security that the company intended to sell should go into trading.

However, comment letters, including one from the Mortgage Bankers Association, criticized this division, pointing out it did not exist in other types of securitizations. The FASB dropped this provision after it was pointed out that Statement no. 115 can be interpreted to say an entity cant even classify something as available for sale if there is a specified period of time in which to sell it. But the main reason for the change, according to Stoklosa, was that the board agreed with respondents that the accounting for securities retained after the securitization of mortgage loans should be the same as the accounting for securities retained after the securitization of other types of assets. Said Stoklosa, Now, a mortgage banking enterprise can go right to Statement no. 115 to make a classification, choosing trading, available for sale or held to maturity. The only requirement the new statement adds is that if you have a sales commitment in place you must put it into trading. Thus, Statement no. 134 accounting is more consistent with other guidance.

The change also affected retained nonsecurity interests. To be consistent, the board eliminated the trading requirement for retained nonsecurity interests that are held for sale. The portions of Statement no. 65 relating to nonsecurity interests remain unamended. The board believed it would have been inconsistent to require a trading classification for retained nonsecurity interests intended to be sold if it no longer required one for retained security interests intended to be sold.

The final change was in the transition: The ED said the guidance would be effective on issuance, but some small mortgage companies said it would be hard to make the change so quickly. The final statement is effective for the first fiscal quarter beginning after December 15, 1998, with earlier application permitted.

To order Statement no. 134, call the FASB at 203-847-0700, ext. 555.

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