Sunday, June 5, 2011

More on Securitization: SPECIAL PURPOSE ENTITIES & SALES OF NOTES

Reprinted with permission from James Kelley

Many of you know that the Notes that were securitized, sold or pledged to special purpose entities. The question is what are the rules for  the SPE?

The following link contains the rules and the definitions that you need to read if you are to understand what the banks have been doing to your loans.

http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=Mun..
The Transfers to the trusts must be true sales by the Transferor ("bank") to the Trust in order to be immune from bankruptcy.

The Washington Mutual Inc Trusts were immune from bankruptcy so we can conclude that the notes that form the collateral for the trusts were true sales.

The trusts were not allowed to purchase lease rents, forward contracts on revenue receipts, servicing rights, etc.

Accordingly, these note" sales"  to the trusts were subject to the Uniform Commercial Code.

The following is a description of the securitization process that had to be followed by Washington Mutual Inc.

Washington Mutual Inc used QSPE for off balance sheet securitization trusts under SFAS 140.

QSPE were abolished in 2009 and replaced by  SPE's but this was after the FDIC receivership.
The main contribution of SFAS 140, which is broadly applicable to securitization activities by public and private companies, in public and private offerings, is to create a new object for GAAP: standards for determining when transfer of financial assets qualify as accounting sales, and when the should be treated as secured financings. Under SFAS 140, accounting sales and off-balance sheet treatment are often affected through the Qualifying Special Purpose Entity (QSPE).  
  • The QSPE can only purchase. 
  • The QSPE purchases financial assets and associated rights of ownership under a sale by a corporation (a true sale in law), which it finances under a simultaneous issuance of non-recourse debt. financial assets (including repackaged financial assets) recognized under GAAP; unrecognized financial assets like operating lease rents, unguaranteed lease residuals from capital leases, servicing rights, stranded utility costs, forward contracts on revenue receipts and structures based on reference pools are not consistent with SFAS140/QSPE treatment;  
  • The restriction of eligible assets, is required to prevent conflict or ambiguity with pre-existing accounting definitions or rules.   
  • The QSPE can only purchase.
  • The purchase must be construed as a sale.
The main contribution of SFAS 140, which is broadly applicable to securitization activities by public and private companies, in public and private offerings, is to create a new object for GAAP: standards for determining when transfer of financial assets qualify as accounting sales, and when the should be treated as secured financings. Under SFAS 140, accounting sales and off-balance sheet treatment are often affected through the Qualifying Special Purpose Entity (QSPE).

The QSPE purchases financial assets and associated rights of ownership under a sale by a corporation (a true sale in law), which it finances under a simultaneous issuance of non-recourse debt. financial assets (including repackaged financial assets) recognized under GAAP; unrecognized financial assets like operating lease rents, unguaranteed lease residuals from capital leases, servicing rights, stranded utility costs, forward contracts on revenue receipts and structures based on reference pools are not consistent with SFAS140/QSPE treatment;


The restriction of eligible assets, is required to prevent conflict or ambiguity with pre-existing accounting definitions or rules. Transferor (the conveyor of assets to the SPE) and it must be remote from the attacks of creditors seeking equitable remedies in a bankruptcy of the Transferor;


This buttresses the legal bankruptcy analysis and imposes criteria on the mechanics of isolation that clarify ambiguities in the one-step process. The satisfaction of these criteria is accomplished by a facts-and-circumstances determination of whether the seller’s stated motivation is aligned with how the structure works. True sale and non-consolidation opinions about the unassailability of the structure in a seller bankruptcy from a law firm of good standing are sine qua non in making this determination.

Compiled and written by James Kelley.

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