Now that the foreclosure crisis has all but subsided, the sometimes-murky process by which creditors classify distressed government-backed mortgages can be streamlined.
The Financial Accounting Standards Board took the first step in that process with its latest accounting standards update – number 2014.14 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). Billed as a consensus reached by the FASB’s Emerging Issues Task Force, the ASU mandates that any mortgage loan should be derecognized upon foreclosure if it meets certain terms.
Those terms include:
- A government guarantee on the loan that is inseparable from the loan prior to foreclosure
- An intent on the part of the creditor to convey the property to the guarantor and make a claim on that guarantee, as well as a reasonable ability on the part of the credit to recover that claim
- Any amount of the claim is made on the basis of a fair and fixed real value at the time of foreclosure.
In essence, this means that, upon foreclosure, government-guaranteed mortgages should be evaluated for certain conditions related to the creditor’s intent, the separability of the guarantee and the basis for valuation. If the conditions are met, the loan should be derecognized and a separate account receivable recorded based on the loan balance expected to be recovered from the guarantor.
ASU 2014-14 is effective for public business entities beginning with the annual period after Dec. 15, 2014. For all other entities, the annual period begins after Dec. 15, 2015. These terms will most commonly be applied to delinquent or repossessed home loans offered by the Federal Housing Administration, the U.S. Department of Housing and Urban Development and the U.S. Department of Veterans Affairs. FHA loans feature full guarantees of the unpaid principal balance for many residential and nonresidential loans. VA loans often offer partial guarantees as well, but in order to make a claim on a government-program loan, the creditor typically must convey to the government the real estate property obtained upon foreclosure.
All creditors holding government-backed mortgages will be affected by the update, as currently, the standards classifying such distressed loans are varied. Some creditors have run into issues classifying foreclosed government-backed loans in the same manner as other, non-supported mortgages, and so the ASU aims to make the process more uniform.
For more information, consult with Eric Bosch, CPA, LaPorte’s Financial Services industry group leader at Ebosch@laporte.com.