Banks and other financial institutions no longer have to worry about collateralized mortgage obligations in their held-to-maturity portfolios. The industry was finally given the go-ahead to place the instruments in that category by the Federal Financial Institutions Examination Council and FASBs Emerging Issues Task Force after an arduous nine-month debate.
The decision was finally put to rest during an EITF meeting July 21 when the regulatory body presented a letter of clarification on its Supervisory Policy Statement on Securities Activities to the task force. EITF members agreed the letter adequately addressed the concerns about whether CMOs meet the definition of held-to-maturity under FAS 115, Accounting for Certain Investments in Debt and Equity Securities.
This is an important accomplishment since many financial institutions have been forced to place CMOs in the available-for-sale category under FAS 115, said Marti Sworobuk, program manager for the Savings & Community Bankers of America. The clarification means that financial institutions that hold CMOs as investments may keep them in the investment portfolio, or move them into the investment portfolio.
The letter, Clarification of Treatment of Nonhigh-risk Mortgage Securities in Reports of Condition and Income and Thrift Financial Reports, states insured commercial banks, thrifts, FDIC-supervised savings banks that have the positive intent and ability to hold-to-maturity nonhigh-risk mortgage securities as defined in the FFIECs Supervisory Policy Statement on Securities Activities may include such securities in the held-to-maturity category on their reports of condition and income and thrift financial reports when the criteria in FAS 115 are met.
The regulators said the April 15 amendment indicated that in certain circumstances examiners might request the divestiture of high-risk mortgage securities. In this connection, it has been noted that the possibility exists that nonhigh-risk mortgage securities may at some time in the future become high risk as defined in the FFIEC policy statement and thus possibly be subject to examiner-ordered divestiture. In view of this possibility, questions have arisen as to whether an institution can have the positive intent and ability to hold to maturity any nonhigh-risk mortgage security and accordingly, whether such securities are eligible for placement in the held-to-maturity category under FAS 115.
The federal regulatory agencies note that only in rare circumstances have examiners required a financial institution to dispose of mortgage securities that have become high-risk after acquisition. Such circumstances have occurred only when examiners have determined that there is a significant safety and soundness concern with respect to a particular institution that has arisen from its holdings of these assets, regulators told FASB.