By: Dan St. Clair, CPA
During times of economic crisis, as the country felt in 2007 and 2008, or industry unrest, as we are currently seeing in the energy sector, there tends to be increased monetary stress on the workforce which often leads to increased mortgage defaults and related foreclosure proceedings. During 2014, the Financial Accounting Standards Board (FASB) provided new guidance in the form of two Accounting Standards Updates (ASU) to address consistency in the reporting for these issues.
ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, deals with the requirements related to the timing for reclassification of foreclosed residential real estate from loans to real estate owned (REO). The standard requires that the creditor either (1) obtain legal title to the residential real estate property or (2) the borrower convey all interest in the property to the creditor through the completion of a deed in lieu of foreclosure or other similar legal agreement. The deed in lieu of foreclosure or similar legal agreement is completed when agreed-upon terms and conditions have been satisfied by both the borrower and the creditor. In other words, the creditor must have legal hold through actual title or completion of a legally executed conveyance. The beginning of or during the foreclosure process is not adequate for reclassification to REO
In addition to defining the timing of the reclassification, ASU 2014-04 also provides for additional new disclosures related to residential real estate in the foreclosure process. The creditor should now disclosure both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in process of foreclosure.
In addition, ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, further defined the reclassification of foreclosed loans under government-sponsored loan guarantee programs such as those offered by the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA). The former guidance did not provide specifics on how to classify or measure foreclosed mortgage loans that are government guaranteed, which lead to inconsistencies in actual practice.
This new guidance required that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if the following conditions are met.
- The government guarantee is not separable from the loan before foreclosure.
- At time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make claim on the guarantee.
- At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed (that is, the real estate property has been appraised for purposes of the claim).
Upon foreclosure, the separate other receivable shall be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. If the three conditions noted above are met, classification as Real Estate Owned would be considered inappropriate
These amendments are effective for annual periods beginning after December 31, 2014.
If you have any questions or wish to discuss further, please contact Dan St. Clair or Lincoln McKinnon at 713.667.9147.