U.S. SEC clarifies mortgage accounting rule [2008-11-13]

NEW YORK - U.S. Securities and Exchange Commission Chairman Christopher Cox said in a letter this week that mortgage servicers may modify individual mortgage loans when a default is "reasonably foreseeable" without violating accounting rules.

Last month, 11 Democrats sent a letter to Cox seeking clarification on the rule known as "FAS 140," which governs the accounting for asset-backed securitized products like mortgage-backed securities.

At issue, was whether a bank could modify a mortgage when it is part of a pool of securities without violating the accounting rule that allows banks to keep the mortgage-backed securities off their balance sheets.

Subprime loans, made to borrowers with poor and nontraditional credit histories, have wreaked havoc in the mortgage market in recent months as higher interest rates led to rising defaults and delinquencies among borrowers.

So the lawmakers asked in June if the loans could be modified when a default is reasonably foreseeable, instead of forcing financial institutions to wait at least 30 days after a default or until the foreclosure process begins.

Cox, in a letter dated July 24, told U.S. House Financial Services Committee Chairman Barney Frank, that the SEC staff believes if modifications are made to a loan when a default is reasonably foreseeable it would not force companies to account for the pooled securities on their balance sheets.

He said the decision was made after a forum with accounting rule makers at the Financial Accounting Standards Board.

Banks could take various steps such as reducing interest rates, extending loan maturity, or granting other concessions to borrowers without violating the rule, Cox said.

"This is a constructive approach that will allow mortgage lenders to provide help at the earliest possible moments to people who might otherwise be trapped in bad loans or forced into foreclosure," Frank said in a statement on Wednesday.