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MORTGAGE BANKERS ASSOCIATION
June 21, 2004
Office of the Comptroller of the Currency
Public Information Room, Mailstop 1-5
250 E Street, S.W.
Washington, DC 20219
Attention: 1557-0081
Ms. Jennifer J. Johnson Secretary
Board of Governors of the
Federal Reserve System
20th and C St, N.W.
Washington, DC 20551
Office of Thrift Supervision
Information Collection Comments
Chief Counsel's Office
1700 G St, N.W.
Washington, DC 20552
Attention: 1550-0023
Steven F. Hanft
Clearance Officer, Legal Division
Federal Deposit Insurance Corporation
55017th St, N.W.
Room MB-3046
Washington, DC 20429
Re: "Consolidated Reports of Condition and Income" 7100-0036 (Board)
"Consolidated Reports of Condition and Income" 3064-0052" (FDIC)
Dear Ladies and Gentlemen:
The Mortgage Bankers Association (MBA) appreciates the opportunity to
comment on the Notice jointly published by the Office of the Comptroller of
the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve
Board and the Office of Thrift Supervision (the agencies) in the April 29,
2004 Federal Register. The Notice proposes that certain delinquent loans
that are collateral for Ginnie Mae securities (Ginnie Mae loans) and
foreclosed Ginnie Mae loans (foreclosed real estate) be classified as "past
due" and "real estate owned," respectively, for regulatory reporting
purposes. As explained in this letter, MBA believes these changes will
misrepresent the risks of these assets and be misleading to readers of the
Consolidated Reports of Condition and Income (Call Report) and Thrift
Financial Report (TFR).
The Mortgage Bankers Association (MBA) is the national association
representing the real estate finance industry, an industry that employs more
than 400,000 people in virtually every community in the country.
Headquartered in Washington, D.C., the association works to ensure the
continued strength of the nation's residential and commercial real estate
markets; to expand homeownership prospects through increased affordability;
and to extend access to affordable housing to all
Americans. MBA promotes fair and ethical lending practices and fosters
excellence and technical know-how among real estate finance professionals
through a wide range of educational programs and technical publications. Its
membership of approximately 2,700 companies includes all elements of real
estate finance: mortgage companies, mortgage brokers, commercial banks,
thrifts, life insurance companies and others in the mortgage lending field.
For additional information, visit MBA's Web site: www.mortoagebankers.orq.
I. MBA Position
MBA believes assets and liabilities should be presented in the Call
Report and TFR (the Reports) in a manner that conveys information that is
most relevant to the needs of analysts and others in rendering decisions
about financial institutions' safety and soundness. Consistent with this
view, MBA believes Ginnie Mae loans1and foreclosed real estate,2 which are
wholly insured or partially guaranteed by the U.S. Government, should be
separately presented from other defaulted loans and foreclosed real estate,
which are subject to partial or no reimbursement by private entities. We
believe the combined presentation of these different sets of assets would
obscure their different risk profiles to the detriment of readers of the
Reports and financial institutions.
For this reason, we believe the agencies should amend their proposal to
require institutions to exclude Ginnie Mae loans from the bodies of Call
Report Schedule RC-N and TFR Schedule PD3 and to include them only in
memoranda items. We recommend also that foreclosed real estate that is
acquired on behalf of HUD and the VA be reported within "Other Assets" on
the balance sheet. Finally, we recommend that the agencies amend Schedules
RC-N and PD, as well as Schedule RC-C,4 to require separate reporting of
"loans and leases held for sale" and "loans and leases held for investment."
As explained on the following pages, we believe our recommended
presentations would provide readers with information that is more relevant
to their needs. The exclusion of Ginnie Mae loans from "past due" and
foreclosed real estate from "real estate owned" balances would ensure that
performance ratios and other analytical measures based on the balances more
accurately indicate institutions' potential exposure to losses. We also
believe the separation of "loans and leases held for sale" and "loans and
leases held for investment" would provide for a clearer presentation of
these assets, which are accounted for differently.
Il. Basis for MBA's Position
A. Relevancy in Reporting -
MBA believes the overarching objective in making decisions about the
presentation of regulatory financial data must be the degree to which a
particular form of presentation is most relevant to readers in rendering
judgments about financial institutions' safety and soundness. In this
regard, we believe a selected form of presentation is not the best form of
presentation if a reader must consistently look beyond the presented
information to other sources to gain a full and accurate understanding of
its relevance to an institution's financial condition and performance. We
feel strongly this would be the case if Ginnie Mae loans and related
foreclosed real estate were reported as "past due" and "real estate owned"
because analysts would have to look beyond regulatory reports to obtain a
proper understanding of the balances in these line items.
Consequently, while we agree that any reporting changes should "...
ensure consistent accounting and reporting for these loans and foreclosed
real estate,"5 we believe the agencies' foremost objective in proposing
reporting changes should be to ensure they will provide users with
information that best meets their needs. Indeed, because a focus on
consistency without regard to relevancy would produce information that would
be the same across financial institutions but of potentially limited use to
readers, the first question to be addressed in making reporting changes must
be: 'Which type of presentation would be most helpful to readers in
understanding institutions' financial strengths and weaknesses?" The Notice,
however, is silent with respect to the comparative advantages and
disadvantages to users of the agencies' proposed presentations of Ginnie Mae
loans and foreclosed real estate.
The authoritative accounting literature emphasizes the importance of
relevancy and consistency in reporting but ranks relevance (and reliability)
as the more important quality in making accounting information useful. FASB
Statement of Concepts No. 2, Qualitative Characteristics of Accounting
Information, includes the following:
"Relevance and reliability are the two primary qualities that make
accounting information useful for decision making. Subject to constraints
imposed by cost and materiality, increased relevance and increased
reliability are the characteristics that make information a more desirable
commodity -- that is, one useful in making decisions. If either of those
qualities is missing, the information will not be useful. Though, ideally,
the choice of an accounting alternative should produce information that is
both more reliable and more relevant, it may be necessary to sacrifice some
of one quality for a gain in another.
To be relevant, information must be timely and it must have predictive
value or feedback value or both. To be reliable, information must have
representational faithfulness and it must be verifiable and neutral.
Comparability, which includes consistency, is a secondary quality that
interacts with relevance and reliability to contribute to the usefulness of
information. Two constraints are included in the hierarchy, both primarily
quantitative in character. Information can be useful and yet be too costly
to justify providing it. To be useful and worth providing, the benefits of
information should exceed its cost. All of the qualities of information
shown are subject to a materiality threshold, and that is also shown as a
constraint." [Primary Decision-Specific Qualities, Summary of Principal
Conclusions] Bolding added.
We call the agencies' attention also to the guidance in FASB Statement of
Financial Accounting Concepts No. 5, Recognition and Measurement in
Financial Statements of Business Enterprises:
"Classification in financial statements facilitates analysis by grouping
items with essentially similar characteristics and separating items with
essentially different characteristics. Analysis aimed at objectives such as
predicting amounts, timing, and uncertainty of future cash flows requires
financial information segregated into reasonably homogeneous groups. For
example, components of financial statements that consist of items that have
similar characteristics in one or more respects, such as continuity or
recurrence, stability, risk, and reliability, are likely to have more
predictive value than if their characteristics are dissimilar." [par. 20]
Bolding added.
We believe this guidance supports our view that similar items with
substantially dissimilar risks should be classified separately in regulatory
reports; particularly if understanding the risk profiles of the items is
integral to readers' needs. Further, we believe the low risk of loss on
Ginnie Mae loans and foreclosed real estate is sufficiently relevant to
users' needs, and reliable in terms of measurement, to justify their
separate presentation for regulatory reporting purposes.
1. Proposed Presentation of Ginnie Mae Loans -
Our members that currently report their Ginnie Mae loans as "past due,"
note that the combined reporting of these loans with other defaulted loans
in Schedules RC-N and PD fosters misunderstandings among analysts and others
who often are not aware that the Schedules include defaulted loans whose
unpaid principal balances are wholly insured or partially guaranteed by the
U.S. Government. This is true because many analysts rely, as an initial
point of reference, on information that is downloaded from regulatory
reports into "canned" programs that calculate performance ratios and other
safety and soundness indicators. For example, the ratios of past due
balances of loans wholly or partially guaranteed by the U.S. Government are
not presented separately from other past due loans in the "Uniform Bank
Performance Report" published by the Federal Financial Institutions
Examination Council (FFIEC).
In these situations, our members must spend considerable time explaining
the distinctions between Ginnie Mae and other defaulted loans to help
analysts fully understand their institutions' financial conditions, which
often involves justifying the relationship between an institution's reported
loan loss reserves and "past due" loan balances. Once the matter is
clarified, analysts revise their findings or analyses to correct for the
inclusion of Ginnie Mae loans in their data. This situation would be
exacerbated if the balances of the Schedules RC-N and PD were carried
forward, without adjustment for Ginnie Mae loans, to other publicly
available regulatory reports, including regulatory reports and reports filed
with the Securities & Exchange Commission.
2. Proposed Presentation of Foreclosed Real Estate6 -
The agencies also argue that because institutions often hold foreclosed
real estate, for conveyance to HUD or the VA, for extended periods of time,
the presentation of such properties as "real estate owned" is appropriate.
By contrast, we believe the amount of time a property is held is less
relevant to an accurate portrayal of the safety and soundness of an
institution than the risk of loss associated with a property. Stated
differently, if analysts were given the choice between knowing the amount of
time an institution might hold a property versus the institution's risk of
loss relative to the property, we would venture to say that the vast
majority of them would select the latter knowledge.
The Notice indicates also that the agencies are not swayed by the
argument that institutions generally regard their interests in foreclosed
real estate as essentially those of agents holding assets in trust for the
U.S. Government. The agencies note that institutions often hold foreclosed
real estate in their own names for extended periods of time until conveyance
of the property to HUD (in the case of FHA loans) or to the VA (in the case
of VA loans). We submit that this is a case of putting "form over substance"
as industry practice clearly reveals that the vast majority of these
properties are managed and held at the behest of the Government.
Additionally, in some circumstances and depending upon applicable state
law, an institution may not hold title to a property at any point between
foreclosure of the loan and conveyance of the property to HUD or the VA,
regardless of how long the property is held. In fact, if certain conditions
are met, HUD encourages "direct conveyances" of properties by mortgagees,
without taking title in their own name first.7 In these cases, the Notice
could be interpreted to mean institutions must distinguish between
foreclosed real estate that they have title to and those that they do not have title to
for the purpose of determining which real estate should be reported as "real
estate owned" for regulatory reporting purposes. This would be a costly
undertaking, especially if it required the continual examination by
institutions of applicable state laws to determine the legal ownership of
individual properties.
We understand also that some regulators may not fully appreciate our
concerns because they consider REO an innocuous label for property that is
held by an institution. In fact, however, REO generally is viewed
unfavorably by analysts and others because it is not an income producing
asset and it can decline in value (as a result of downturns in the real
estate market). By contrast, foreclosed FHA and VA loans are receivables
from the U.S. Government which are not subject to declines in value and, in
the case of foreclosed FHA loans, are "performing" in the sense that they
earn interest through the date they are conveyed to HUD.
We believe these distinctions would be lost to many readers if foreclosed
real estate were reported as REO. More specifically, we believe analysts
would draw incorrect conclusions regarding institutions' financial
conditions and performance if these distinctly different assets were
required to be reported as one. In those circumstances, financial
institutions would have to educate users as to the composition of their REO
balances with the likely result that the balances would be adjusted to
exclude their foreclosed FHA and VA loans.
We think the standard for reporting foreclosed real estate should follow
current industry accounting practice which reflects the different methods of
disposing foreclosed real estate and REO. Currently, the balances of
foreclosed privately insured single-family residential mortgage loans are
reclassified upon foreclosure (if the lender submits the winning foreclosure
bid) and reported at the lower of their carrying amounts or "net realizable
values," defined as their market values less expected costs to sell. By
contrast, most institutions reclassify Ginnie Mae loans upon foreclosure as
receivables because a "net realizable value" calculation for properties that
will be conveyed, rather than sold, is irrelevant.
GAAP currently provides for foreclosed loans to be classified for
financial reporting purposes as "other assets" given the substantive
differences between foreclosed loans and other REO. Specifically, AICPA
Statement of Position 01-6, Accounting by Certain Entities (Including
Entities With Trade Receivables) That Lend to or Finance the Activities of
Others, permits foreclosed assets to be classified "...as a separate balance
sheet amount or included in other assets on the balance sheet with separate
disclosures in the notes to the financial statements."8 Consistent with this
guidance, we would support an amendment of Schedule RC-F9 and/or Schedule SC10
to include separate line items for foreclosed real estate.
3. Presentation of Loans Held for Sale versus Held for Investment
We believe "loans and leases held for sale" and "loans and leases held
for investment" which must be accounted for at "lower of cost or market
value" or "amortized cost," respectively, should be presented separately in
Schedules RC-N and PD, and Schedule RC-C. We believe their separate
presentation is appropriate and relevant to users given that their reported
balances are based on different measurement approaches.
Conclusion
MBA believes assets should be reported in a manner that is most relevant
to the needs of analysts and others in rendering decisions about financial
institutions' safety and soundness. We believe the fact that losses of
principal on Ginnie Mae loans and foreclosed real estate are wholly insured
or partially guaranteed by the U.S. Government is sufficiently relevant to
warrant their separate reporting in the Call Report and TFR.
Again, we recommend that the agencies amend their proposal and the
Reports to require Ginnie Mae loans to be excluded from the bodies of
Schedules RC-N and PD and included only in memoranda line items. At the
least, we recommend that the agencies require that Ginnie Mae loans be
presented on separate line items within the Schedules. We recommend also
that the agencies amend Schedules RC-N and PD, as well as RC-C, to require
separate reporting of "loans and leases held for sale" and "loans and leases
held for investment." Finally, we recommend foreclosed real estate be
reported as "Other Assets" on the balance sheet.
Our recommended presentation approaches would:
• Provide analysts and other readers of the Call Report and TFR with
information that is most relevant to their needs;
• Achieve the agencies' objective of ensuring consistency in reporting
across financial institutions;
• Be consistent with the predominant industry practice of holding foreclosed
real estate for conveyance to HUD and the VA, rather than for sale to third
parties;
• Be consistent with GAAP;
• Level the playing field by ensuring that financial institutions are not
placed at a competitive disadvantage with companies that are not subject to
regulatory reporting requirements;
• Reduce the time and effort that analysts and others currently must spend
(where companies currently follow the agencies' proposed presentations) with
sources outside the Reports to "drill down" beyond the balances in the
Reports to get a proper understanding of institutions' financial performance
and conditions.
For these reasons, we strongly recommend that the agencies adopt our
proposed presentations.
Thank you again for the opportunity to share our comments with you. If
you have questions about our position or would like more details concerning
our recommendations, please contact Alison Utermohlen, staff representative
to MBA's Financial Management Committee, at 202/557-2864.
Most sincerely,
Jonathan L. Kempner
President and Chief Executive Officer
Mortgage Bankers Association
1919 Pennsylvania Ave., NW
Washington, DC 20006
1 Ginnie Mae loans include loans insured or guaranteed by the U.S.
Government through the Federal Housing Administration, Farmers Home
Administration, or Veterans Administration. However, because MBA members
securitize primarily FHA and VA loans, our comments are confined to them.
2 Because defaulted multifamily FHA loans are conveyed to HUD prior to
foreclosure, the term "foreclosed real estate" refers only to foreclosed FHA
and VA single family residential loans.
3
Schedule RC-N is entitled "Past Due and Nonaccrual Loans, Leases, and Other
Assets" and Schedule PD is entitled "Consolidated Past Due and Nonaccrual."
4 Schedule RC-C Is entitled "Loans and Lease Financing Receivables."
5 See Federal Register Vol. 69, No. 83, page 23504.
6 Defaulted multifamily FHA loans are transferred to HUD prior to
foreclosure. HUD handles loan foreclosure and sales of the related real
estate. Consequently, our comments here relate to foreclosed FHA and VA
loans on single-family residential loans.
7
See 24 CFR 203.358.
8 See paragraph f.
9 Schedule RC-F of the Call Report is entitled "Other Assets."
10 Schedule SC of the TFR is the "Consolidated Statement of Condition" which
includes an "Other Assets" section.
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