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Society Offers Suggestions on Foreclosed Properties Proposal

Published Date:
Mar 3, 2014

The NYSSCPA generally agreed with a proposal from the Financial Accounting Standards Board (FASB) that would standardize the treatment of foreclosed properties when they’re backed by a loan from the U.S. Department of Housing and Urban Development (HUD), but said that the guidance should be applied well beyond the residential developments that were the focus of the exposure draft.

The Society made its comments in a Feb. 26 letter drafted by members of its Accounting and Auditing Oversight and Financial Accounting Standards committees. The letter was a response to the FASB exposure draft, “Proposed Accounting Standards Update: Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure,” which was released to the public on Jan. 17.

With the proposal, the FASB aims to standardize the classification of government-guaranteed residential mortgage loans that entitle a creditor to the full unpaid principal balance of a loan upon foreclosure.

Under some government programs—most commonly, those offered by HUD’s Federal Housing Administration (FHA)—creditors that issue certain residential mortgage loans receive a guarantee that they will be paid by the government in the case of a default. However, according to the FASB exposure draft, while U.S. generally accepted accounting principles (GAAP) offer guidance for situations in which a creditor receives a debtor’s assets, it does not offer guidance regarding the classification or the measurement of foreclosed loans that are government guaranteed—leaving in question whether the mortgage loan is derecognized and then put on the books as real estate owned by the lender or treated as a receivable.  As a result, the FASB said, there are currently a number of different ways in which creditors classify the loans.

The proposal would require that residential mortgage loans be derecognized if the loan has a government guarantee inseparable from the loan before foreclosure, with a full separate other receivable being recognized upon foreclosure. This can only happen, though, if the creditor has the intent to make a claim on that guarantee and the ability to recover the full unpaid principal balance of the loan through the guarantee. 

In its comment letter, the Society said that the overall principle was sound, but wondered why it should only apply to residential mortgage loans, as the general concepts are the same, regardless of the type of property. Expanding the concept to include nonresidential government-backed loans would allow the topic to be more representative of FHA mortgages in the marketplace, the Society said.

“The guidance needs to apply to not just residential housing, but to all types of government-guaranteed programs, such as those covering hospitals and nursing homes,” said Sharon Sabba Fierstein, an NYSSCPA past president and one of the letter’s authors. “We believe that the way [the proposal] was written, a reader would conclude it only covered single-family mortgages, rather than also the multifamily and healthcare mortgages insured by HUD programs.”

Beyond that, the Society also expressed concern about the proposal’s language regarding the intent and ability of the creditor to make a claim on the guarantee and recover the full unpaid principal balance of the loan, as it felt this was ambiguous and needed further clarification.

“While the concept of intent and ability is used throughout GAAP, we believe that, in this context, this language was not helpful,” she said. “Since a lender typically participates in HUD programs specifically due to the government guarantee, it would be hard to imagine that such a lender would not have the intent or ability to make the claim on the guarantee. The language does not provide any additional useful guidance.”   

Still, the Society was largely in agreement with the proposal, with Fierstein saying that it made sense and that she could understand why the FASB felt the need to address this particular matter.

“In the HUD foreclosure process, the lender never actually takes control of the property. HUD does,” Fierstein explained. “That’s why the exposure draft made so much sense: The mortgage loan should never become real estate owned by the lender; due to the guarantee, HUD owns the asset and handles its disposition.”

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