The Financial Accounting Standards Board rejected another Wall Street effort to design commercial mortgage backed securitizations (CMBS) compliant with FAS 140, in effect since April 1, according to a report by Dow Jones Newswires in the Wall Street Journal,
FASB senior project manager Halsey Bullen, following an all day meeting on the rule, the board determined that language employed in recent CMBS offerings has failed to comply with the new regulation.
Bullen said that the Board has not yet disseminated its decision and it will likely be a few days until it works out the language, according to the report.
He also said that before the final ruling is issued, FASB will issue the draft statement for comment and determine the reaction. Bullen said he hopes to have the issue resolved by June.
However, he said any new rulings or clarifications will be “prospective,” meaning that CMBS transactions that have been completed since April 1 will be allowed to stand even though the language is not considered compliant.
FAS 140, which deals with “Accounting for Transfers and Servicing of Financial Assets and Extinguishment Liabilities,” went into effect April 1.
It includes restrictions on activities of a qualifying special purpose entity (QSPE), which takes over all assets being securitized. The rule prohibits a QSPE from making decisions about whether to sell a loan. Instead, it permits the QSPE to sell a loan only as an “automatic response” to a default.
The ruling was surrounded by some controversy among several market sources, who questioned the definition of an automatic response. According to those sources, it seemed that the issue came down to a question of whether there is a special servicer for the transaction or not. In CMBS deals, the special servicer is empowered to step in take action to protect the property values. However, under FASB 140, the presence of a special servicer was seen as signaling that the transaction is considered a financing of the mortgages, not a sale for tax treatment.
CMBS deals are designed to be treated as sales issuers because it allows them to remove assets from their balance sheets for tax purposes. Without sales treatment, most issuers would not have an incentive to issue CMBS, analysts at Merrill Lynch said in a recent report.
The report cited a case that involved a $1.1 billion deal of commercial mortgage backed securities. Credit Suisse First Boston chose a course that interpreted the ruling in a manner that still maintained the integrity of the traditional CMBS structure.
CSFB reportedly sought to provide an interpretation of FAS 140 and designed its securitization to specifically comply with the new ruling.
At the time of the CSFB offering, some industry sources said that what the bank had done was merely a case of semantics – as it merely spelled out exactly the role of the special servicer as it always was.
Nevertheless, the CSFB securitization was very successful, quickly followed by several other transactions that utilized variations of the CSFB interpretation.
But according to FASB’s Bullen, the CSFB language will not be sufficient to circumvent the QSPE issue.