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Mortgage Pool Accounting

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					2010 FALL CONFERENCE
Mortgage Pool Accounting Issues & Insights
Mortgage Pools - Technical Accounting Issues
Mortgage Pools - Technical Accounting Issues

 Accrual Basis vs. Cash Basis
  o   Subscription Cash Accounts
      • Recorded on the Fund’s books – creates
        corresponding liability

  o   Interest Receivable
      • Accrues to the benefit of investors on a daily
        basis
      • Creates initial income vs. cash on hand
        issues

  o   Loan Loss Reserves
      • Reduces net income available for allocation
        to investors
      • Is not supported by a separate “cash”
        account
      • Creates book vs. tax differences
Mortgage Pools - Technical Accounting Issues – (Continued)

 Accrual Basis vs. Cash Basis
  o   Real Estate Owned (REO)
      • Held for Sale – Valuation
      • Held for Use – Valuation / Depreciation
      • Capitalized vs. Operating Expenses

  o   Discounted Note Acquisitions
      • Cash Flow Projections
      • Accretable Yields
      • Non-accretable Yields

  o   Distressed Asset Acquisitions
      • Recorded at COST
      • Lower of Cost or Fair Value Approach
Mortgage Pools - Technical Accounting Issues – (Continued)

 Accrual Basis vs. Cash Basis
  o   Accrued Late Fees & Other
      • Accrual governed by Offering/PPM
      • Allowance for Doubtful Collection of Late
        Fees, Default Interest, etc.

  o   Loan Origination Fees
      • Typically taken by Manager
      • Revenue Recognition at Fund level
        requires capitalization and amortization
        to income over life of related loan

  o   Organization / Start-Up Costs
      • Required to be expensed for GAAP
      • Amortized over 5 years for tax
Mortgage Pools - Technical Accounting Issues – (Continued)

 Accrual Basis vs. Cash Basis
  o   Loan Servicing Fees
      • Calculation governed by offering/PPM
      • Liability that must be recognized by the
        Fund regardless of collection

  o   Asset Management Fees
      • Calculation governed by offering/PPM
      • Must be recognized in applicable period

  o   Performance Fees
      • Calculation governed by offering/PPM
      • Must be recognized in applicable period
Mortgage Pools - Technical Accounting Issues – (Continued)

 Accrual Basis vs. Cash Basis
  o   REO Senior Liens / Encumbrances
      • REO Valuation – Gross Up
      • Interest Expense / Accrual
      • Property tax and insurance accruals

  o   Lines of Credit / Warehouse Debt
      • Interest Expense / Accrual
      • Must be recognized in applicable period

  o   Members’ Equity
      • MRFI’s - Debt
      • Distributions vs. Withdrawals
Mortgage Pools - Auditing Issues
Mortgage Pools - Auditing Issues

  Subscription Cash Accounts
   o   Often times not recorded on
       Fund’s books / FS’s

  Interest Receivable
   o   Recorded net of Servicing Fees
   o   360 vs. 365 day basis

  Loan Loss Reserves
   o   Adequacy
   o   Specific vs. General
   o   Timely Review / Updates
   o   Lack of Valuation Support
Mortgage Pools - Auditing Issues – (Continued)

  Real Estate Owned (REO)
   o   Initial Recording (Lower of Cost or Fair
       Value)
   o   Subsequent Valuations
   o   Capitalized vs. Operating Costs

  Discounted Note Acquisitions
   o   Initial Recording
   o   Subsequent Valuations
   o   Revenue Recognition

  Distressed Asset Acquisitions
   o   Initial Recording
   o   Subsequent Valuations
   o   Capital vs. Operating Costs
   o   Gains / Losses on Sales
Mortgage Pools - Auditing Issues – (Continued)

  Accrued Late Fees & Other
   o   Accrual in one period with write-off in
       another period

  Loan Origination Fees
   o   Revenue recognition – recognized
       upon receipt vs. capitalizing and
       amortizing over the life of the related
       loans

  Organization / Start-Up Costs
   o   Belief that costs can be taken and
       expensed over time
   o   Yield Impact – Incorrect Distributions
Mortgage Pools - Auditing Issues – (Continued)

  Loan Servicing Fees
   o   Accrual is often not recorded on
       Fund’s books

  Asset Management Fees
   o   Calculated on gross vs. net
       assets

  Performance Fees
   o   Calculated with non-static
       equity / partner capital accounts
   o   Yield Impact – Incorrect
       Distributions
Mortgage Pools - Auditing Issues – (Continued)

 REO Senior Liens / Encumbrances
   o   REO Gross-up not recorded
   o   Interest recorded when paid
   o   Support for outstanding balance and terms
       for disclosure

 Lines of Credit / Warehouse Debt
   o   Interest recorded when paid

 Members’ Equity
   o   Contributions / Withdrawals with Incorrect
       Share Price
   o   Incorrect Allocations of Earnings and
       resulting Distributions due to common errors
       noted above
Mortgage Pools - Software Issues
Mortgage Pools – Software Issues

                        Decision for Servicing


In-house Servicing                     3rd Party Servicer

 Need Software                         Pool Servicing
   o   The Mortgage Office (TMO)          o   Drives ABS software
 Need Personnel Resources                    inputs/outputs based on Fund
                                              Management directives
   o Fund Manager
   o Loan Servicer
                                        Loan Servicing
   o Accountant                         Allows you to focus on raising
                                         capital and closing deals
 Manager retains 100% of loan
  servicing fees                        Cost Structure
Mortgage Pools – Software Issues – (Continued)

 Software Needs

 Integrated modules
   o Loan Servicing
   o Trust Accounting
   o Mortgage Pool Servicing



 Supplementary G/L Software
   o   QuickBooks


 Supplementary Schedules
   o   Excel
Mortgage Pools – Software Issues – (Continued)


 Property/REO Handling
   o   Tracking and activity
 Monthly Accruals
   o Entered daily
   o Calculated based on PPM

 Daily Share Value
   o   Set and accurate on a daily basis
 Performance Fee Calculation
   o   Lock down
 Month End Close
   o   Reconciliations
Summarized Keys to Mortgage Pool Success




  Surround yourself with a team
   of industry experts; this will
   pay dividends
   o   CPA – Armanino McKenna
   o   Attorney – Geraci Law Firm
   o   Loan & Pool Servicer - FCI
   o   Software Provider - ABS
                 What Questions
                 Do You Have?
                 We’re here to help!




5/26/2011   20
Contact Us
Armanino McKenna LLP Certified Public Accountants & Consultants
Joshua K. Nevarez – Partner Lead of the Firm’s Mortgage Pool Practice
p. 925.790.2710
e. josh@amllp.com

				
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