Industry Ponders Future Without QSPEs

MBA (6/9/2008 ) Murray, Michael
Proposals under consideration by the Financial Accounting Standards Board (FASB) to tighten the accounting rules for off-balance sheet “variable interest entities” (VIEs) have the potential to force banks to place up to $5 trillion of securitized assets back on their books.

The proposals raise concerns among banks about the advisability of certain loan securitization arrangements.


Over the past year, members of FASB have become increasingly committed to changing the accounting rules to eliminate the concept of a “qualifying special purpose entity,” as that term is defined in FASB Statement 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Under that Statement, VIEs that are QSPEs are automatically exempt from consolidation by other entities.

FASB now appears to believe the QSPE concept should be eliminated to require all VIEs to be evaluated for possible consolidation by parties with interests in them, according to Alison Utermohlen, associate vice president for government affairs at the Mortgage Bankers Association.

The elimination of the QSPE concept would require changes to the conditions that must be met for a transfer of an asset to qualify for sale treatment under FASB Statement 140, as well as those conditions that must be evaluated to determine whether a VIE should be consolidated by another entity under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities.

FASB’s discussions raise concerns that sellers could be required to recognize securitized loans on their books, rather than treat them as having been sold. Parties with interests in the securitization vehicles—the VIEs—are also concerned that the elimination of the QSPE concept could require them to consolidate the vehicles. These concerns are heightened by the fact that the FASB has not decided whether changes to the rules should be applied prospectively or retroactively.

Citigroup analysts said last week that if previously transferred loans were required to be brought back onto the company’s balance sheet the change would adversely affect its debt-to-equity ratios and make lending operations more difficult.

Others, however, argue that the elimination of the QSPE concept would benefit financial institutions in the long run by increasing investor confidence in the residential and commercial mortgage-backed securities (RMBS and CMBS) markets. They contend that if more securitized loans were required to be reflected on lenders’ books, lenders would have a great interest in ensuring the unlikelihood of loans to default.

They also believe a change in the rules could strengthen the financial markets and increase the safety and soundness of the banking system by requiring more capital to be held by banks.

“The absurdity is not $5 trillion coming back on bank balance sheets. Rather the absurdity is with accounting rules that let banks hold this much stuff off balance sheets in the first place,” said industry analyst Michael Panzer, author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes. “It makes a mockery of stated leverage, value at risk and capitalization ratios. Banks claim to be well capitalized but the ratio is a mere 6 percent and that 6 percent does not include the effects of hiding $5 trillion off balance sheets.”

FASB is expected to release a proposed amendment to Statement 140 later this month. Utermohlen said MBA and its members are preparing to comment on the proposal.