Accounting Proposal for Troubled CMBS Loans Falls Short.(Financial Accounting Standards Board)(Brief Article)

The Financial Accounting Standards Board (FASB) has accepted one industry proposal that will make it easier for special servicers in the CMBS sector to deal with defaulted loans without losing their Qualified Special Purpose Entity (QSPE) status under FASB 140, according to the Mortgage Bankers Association of America (MBA).

Under FASB 140, the transfer of assets to servicers qualifies as a sale, so long as the transferee is a QSPE.

A QSPE has to be a passive entity by the FASB definition.

Alison Utermohlen, senior director, accounting tax policy, Mortgage Bankers Association, said that this precludes a special servicer from performing net present value calculations on defaulted loans to consider alternative courses of action, such as the sale or workout of the loan, or foreclosure.

She explained, "The Board said (in a recent meeting with the MBA) that the calculation of net present value by a special servicer does not qualify as an activity that a QSPE can undertake since it involves too much discretion in deciding among alternate scenarios."

While the FASB has disqualified such activity, the board has clarified that it will be all right for a special servicer to exercise a call option to purchase - at its prevailing fair market value - a loan that goes into default without calling into question its status as a QSPE, Ms. Utermohlen said.

The servicer could then opt to sell the loan if that is the best possible course of action.