The Commercial Mortgage Securities Association (CMSA) and the Mortgage Bankers Association (MBA) filed a comment letter with banking regulators Oct. 7 to address the proposed risk-based capital treatment of assets coming on the books of banks on Jan. 1, 2010, as a result of FAS 166 and FAS 167. FAS 166 and FAS 167, issued by the Financial Accounting Standards Board in June 2009, will generally require that assets and liabilities of prior private label residential mortgage-backed securities and commercial mortgage-backed securities be put on the balance sheet of the issuer, servicer or special servicer for all deals prior to Jan. 1, 2010. These new guidelines will also apply to all deals commencing on or after that date.
In the joint letter, CMSA and MBA recommend that the regulators grant regulatory capital relief if a security meets the following structure:
◄ If the primary beneficiary is the transferor, the transfer meets all other criteria for sale accounting under FAS 166;
◄ The beneficial interest holders of the Variable Interest Entity (VIE) have no recourse to the general credit of the primary beneficiary other than standard representations and warranties;
◄ The VIE’s assets can be used only to settle the obligations of the VIE; and
◄ There are no explicit arrangements or implicit variable interests that could require the primary beneficiary to provide financial support (for example, liquidity arrangements and obligations to purchase assets) to the VIE, other than servicing advances, which are only required if the servicer deems them to be collectible.
“While the International Accounting Standards Board hasn’t yet issued its FAS 166 and 167-equivalent reporting standards, there are significant differences in approach between FASB’s and the IASB’s exposure drafts,” said Dottie Cunningham, chief executive officer of CMSA. “This should serve as further reason to delay the regulatory capital impact of FAS 166 and FAS 167,” she continued. “We and many other trade organizations have been consistent in our comments to both FASB and IASB that all standards related to financial instruments should be worked on jointly and converged on an accelerated basis.”
“FAS 166 and FAS 167 will require hundreds of billions of dollars of assets to come onto the banks’ balance sheets on Jan. 1, 2010,” said John A. Courson, MBA’s president and CEO. “These assets would immediately require an allocation of capital under the regulatory capital rules proposed. Coming at a time when regulatory capital is already a scarce resource, it may hinder the current economic recovery underway.”
A copy of the joint comment letter can be found by clicking here.