Gain-on-sale accounting is going to lose its shabby reputation in coming months, as reliable companies use the method accurately, predicts Conseco Inc. chief financial officer Rollin Dick.
"The companies that gave gain-on-sale a bad name are gone," he said, speaking at this week's Bank and Financial Analysts Association conference. "Conseco, Countrywide, and others that use the method will reestablish its credibility," he said.
Gain-on-sale accounting re-quires lenders to book profits according to predicted loan performance.
Conseco, a Carmel, Ind.-based insurer, bought GreenTree Financial Corp., a St. Paul, Minn.-based manufactured housing lender that suffered when it was forced to restate earnings because of inaccurate predictions about its loan performance.
Several other lenders were hit with similar charges last year, and investors have been leery of any company that uses this accounting method.
"I've been surprised by the degree of concern in the market," Mr. Dick said. Conseco's stock price dropped significantly after it purchased GreenTree, and has not yet recovered.
Mr. Dick said that investors who have been burned by companies that abused gain-on-sale accounting have mistakenly concluded that it's a "flawed concept."
Gain-on-sale accounting is "neither good or bad, safe or risky," he said.
Mr. Dick said Conseco considered converting GreenTree to a portfolio lender, or to a company that doesn't use gain-on-sale, when it closed the purchase.
If Conseco had eliminated gain-on-sale accounting from GreenTree when it bought the company, the "transition would have been ugly," Mr. Dick said.
Conseco's current book value would also be 18% lower, Mr. Dick said, but most other factors such as shares outstanding and liquidity would be the same.
The company had the "benefit of hindsight," he said, and adopted very conservative valuations in all of its accounting assumptions.
Lenders that use gain-on-sale accounting have the same cash flow and initial economic value as companies that use portfolio accounting, he said. Both also share the same loss potential in cases of interest rate or default rate increases.
The accounting method also allows for a lower cost of funds, and best reflects Conseco's real economic value, he added.