The Federal Reserve announced two initiatives totaling $800 billion designed to address the financial crisis. To reduce the cost and increase the availability of credit for home buying amid the economic crisis, the Federal Reserve unveiled a $600 billion program to purchase the direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks as well as mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. Purchases of up to $100 billion in direct obligations under the program are to be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions. Purchases of up to $500 billion in mortgage-backed securities are to be conducted by asset managers. Purchases of direct obligations and mortgage-backed securities are expected to take place over several quarters under the plan, which was announced Nov. 25.
On the same day, the Federal Reserve Bank of New York and the Treasury Department announced a plan to pump billions into a lending facility for the consumer asset-backed securities market. The Federal Reserve Bank of New York will make up to $200 billion in loans under the plan, called the Term Asset-Backed Securities Loan Facility. Each loan will have a one-year term, will be nonrecourse to the borrower, and will be fully secured by eligible asset-backed securities. The Treasury will provide $20 billion of credit protection to the Federal Reserve.
The asset-backed securities market provides liquidity to financial institutions that make small business loans and offer consumer lending such as auto loans, student loans and credit cards. Issuance of consumer asset-backed securities dropped precipitously in the third quarter of 2008, according to the Treasury, before essentially coming to a halt in October. In outlining the plan, the Treasury cited worries that continued disruption in the asset-backed securities market could further deteriorate credit availability for consumers and exacerbate economic woes in the U.S. in general.
Under the plan, the underlying credit exposures of eligible securities initially must be newly or recently originated auto loans, student loans, credit card loans or small business loans guaranteed by the Small Business Administration. The facility may be expanded over time, and eligible asset classes may be revised later to include assets such as commercial mortgage-backed securities, nonagency residential mortgagebacked securities or other asset classes. A term sheet is available at http://tinyurl.com/5zuqh7.
The major federal bank, thrift and credit union regulators issued proposed Interagency Appraisal and Evaluation Guidelines that clarify risk management principles and internal controls for ensuring that financial institutions’ real estate collateral valuations (both appraisals and evaluations) are reliable and support their real estate-related transactions. The proposal was issued jointly by the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration.
The proposal replaces 1994 interagency guidance by incorporating recent supervisory issuance and reflecting changes in industry practice, uniform appraisal standards and new technology. The new guidance applies to all real estate lending functions within a federally regulated institution, including commercial and residential lending departments, capital market groups, and asset securitization and sales units.
Revisions in the proposal address:
- Details on the agencies’ expectations for an independent appraisal and evaluation function.
- Greater explanation of the agencies’ minimum appraisal standards, including clarification of requirements for appraisals of residential tract developments.
- Revisions to the Uniform Standards of Professional Appraisal Practice, which are incorporated by reference in the agencies’ appraisal regulations.
- Risk-focused appraisal and evaluation reviews separate and apart from an institution’s compliance function.
- New appendices—Appendix A provides further clarification on real estate transactions that are exempt from the agencies’ appraisal regulations; Appendix B addresses acceptable evaluation alternatives and use of automated valuation models; and Appendix C contains a new glossary of terms.
The comment period closed Jan. 20. The Proposed Interagency Appraisal and Evaluation Guidelines as published before the close of the comment period are available at the Federal Register online at www.gpoaccess.gov/fr/.
The SEC is stepping up information sharing with foreign regulators “to investigate the causes of…unprecedented market volatility, as well as those who may have unlawfully promoted it or profited by it, and the extent to which market manipulation might have contributed to it,” said SEC Chairman Christopher Cox in a Nov. 18 speech. “Recently we have placed emphasis on an enhanced enforcement MOU (memorandum of understanding) that goes well beyond what is reflected in existing agreements, or in the IOSCO (International Organization of Securities Commissions) Multilateral Memorandum of Understanding.”
This new kind of agreement would extend to the sharing of accounting information, including audit work papers; telephone and Internet service provider records; credit card records; travel records; employment information; and corporate records. Regulators would also assist one another in obtaining records of testimony, responses to questions and statements from witnesses. The full text of Cox’s speech is available at www.sec.gov/news/speech/2008/spch111808cc.htm.
The Federal Accounting Standards Advisory Board (FASAB) is seeking comment on two exposure drafts, Social Insurance Accounting, Revised and Estimating the Historical Cost of General Property, Plant, and Equipment—Amending Statements of Federal Financial Accounting Standards 6 and 23.
The Social Insurance proposal addresses challenges associated with incorporating estimates of future cash flows of massive federal programs such as Social Security and Medicare into financial statements. All FASAB board members have supported new reporting on fiscal sustainability in the consolidated Financial Report of the United States Government. However, they have had different views about the timing of the recognition of expense and liability for social insurance programs.
“This exposure draft represents a compromise,” FASAB Chairman Tom Allen said in a press release. “It proposes enhanced reporting but does not resolve the two strongly held views regarding when the obligating event occurs for social insurance programs and, thus, when the liability and expense definitions are met within those programs. However, the proposed standard will provide additional key information not currently provided and links information from the statement of social insurance to other basic financial statements.”
The ED on Historical Cost proposes amendments to clarify that reasonable estimates of original transaction data historical costs may be used to value general property, plant and equipment. It permits continued application of the initial capitalization guidance in SFFAS 23, Eliminating the Category National Defense Property, Plant, and Equipment, that provides for estimating historical cost and accumulated depreciation consistent with SFFAS 6, Accounting for Property, Plant and Equipment, but offers more detail about permissible documentation and methods. The statement’s primary objective is to establish a cost-effective method for attaining compliance with SFFAS 6 as amended.
Comments on the Social Insurance proposal are due Feb. 9, and the statement would be effective for periods beginning after Sept. 30, 2009. A public hearing is tentatively scheduled for April 22. Comments on the Historical Cost proposal are due Jan. 30, and the statement would be effective immediately upon issuance. A public hearing has not been scheduled on this proposal. Each ED is available at www.fasab.gov/exposure.html.
Suspicious activity reports (SARs) citing mortgage loan fraud and identity theft saw rapid increases in the first half of 2008, while reported instances of terrorist financing continued a four-year downward trend, according to The SAR Activity Review—By the Numbers issued by the Financial Crimes Enforcement Network (FinCEN). In the first six months of 2008, FinCEN said the total volume of SARs within the Bank Secrecy Act database increased 5% compared with the same six-month period in 2007.
SARs related to mortgage loan fraud and identity theft, respectively, leapt 39% and 22%. Terrorist financing reports declined 28%. SARs related to terrorist financing have declined every year since 2004.
Issue 11 of The SAR Activity Review—By the Numbers is available at www.fincen.gov.
The nation’s thrifts continued to pile up losses, and the number of troubled thrifts increased from 17 to 23 in the third quarter of 2008, the Office of Thrift Supervision reported. The industry lost $4 billion in the quarter as weakness in the housing market prompted thrifts to set aside $7.9 billion in loan-loss provisions, raising total reserve provisions to $23.4 billion in the four quarters.
Return on assets was 1.35% in the quarter, compared with 0.57% in the second quarter. ROA was 0.20 a year ago.
Complete results are available at www.ots.treas.gov.
The SEC finalized a rule requiring mutual funds to provide investors with a concise summary of the key information they need to make informed investment decisions. The new summary prospectus will appear at the front of a fund’s prospectus. The SEC also approved a new rule that permits sending a summary prospectus to satisfy prospectus delivery requirements provided that the mutual fund’s summary prospectus, statutory prospectus, and other specified information are available online. The rule changes are effective Feb. 28, 2009, and funds must begin complying with the form changes on Jan. 1, 2010. The full text of the SEC’s final rules is available at www.sec.gov/rules/final.shtml.
The PCAOB approved a $157.6 million budget for calendar year 2009. The proposed budget, subject to SEC approval, is an increase of approximately 9% over the $144.6 million budget for 2008. Under the Sarbanes-Oxley Act of 2002, the PCAOB budget provides the foundation for the 2009 assessment of accounting support fees that public companies and other issuers pay. The fees are expected to generate an estimated $151.8 million in 2009, up from $134.5 million this year.
The majority of the PCAOB’s expenses are associated with hiring and retaining accountants needed to conduct inspections of registered public accounting firms. Firm registration and inspection personnel currently account for roughly half of the total staff. The PCAOB expects to employ 531 people by year-end 2009, up from approximately 485 this year.
As of Oct. 31, 1,866 public accounting firms were registered with the PCAOB, including 879 firms that are based outside the U.S. By law, registered firms with more than 100 public company audit clients must be inspected annually; firms with fewer public company audit clients must be inspected at least once every three years.