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03 Nov. 2010 | Comments (0)

It looks like public company directors don’t have to just heed my warning [See Oct. 20 blog post.]about addressing the possible fallout from the current foreclosure crisis. By now their management teams should have told them the SEC is gently reminding them of their obligation to disclose the risks and uncertainties their companies may have related to such securities. A so-called Dear CFO letter last month wasn’t just sent out to the CFOs of banks, mortgage lenders and other financial services companies. In fact, the agency’s Division of Corporation Finance sent the letter to certain public companies as a “reminder of their disclosure obligations to consider in their upcoming 10-Qs and subsequent filings, in light of continued concerns about potential risks and costs associated with mortgage and foreclosure-related activities and exposures.” But the paragraph that is most telling is the last one. (Thanks to FEI Financial Reporting Blog for pointing this out.)  It literally states that non-financial companies need to be aware of the disclosure obligations as well.
“Some of these issues are not limited to financial institutions that sold or securitized mortgages or mortgage-backed securities,” the letter states. “Issuers that engage in mortgage servicing, title insurance, mortgage insurance, and other activities relating to residential mortgages should also consider the impact of these and similar issues for their disclosures.”
Regarding that disclosure, the letter focuses on seven particular areas of “risks, uncertainties, and effects of defects” tied to mortgages and related securities that companies should include in their filings:
  • Risks and uncertainties associated with potentially higher repurchase requests as a result of any foreclosure review process and any changes to the methodology or processes you use to estimate any repurchase reserve;
  • Litigation risks and uncertainties related to any known or alleged defects in the securitization process, including any potential defects in mortgage documentation or in the assignment of the mortgages;
  • Litigation risks and uncertainties related to any known or alleged breach of the pooling and servicing criteria, including any potential defects in the foreclosure process;
  • Risks and uncertainties associated with any agreements or understandings, including for indemnification and settlement, with title, mortgage, and bond insurers regarding coverage;
  • Potential effects of defects in the securitization process or improper application of the pooling and servicing criteria on the valuation and any possible impairment of your mortgage servicing rights (MSR);
  • Potential effects of defects in the securitization process or improper application of the pooling and servicing criteria on the recognition or impairment of servicing advances, and related effects to your liquidity; and
  • Potential effects of changes in the timing of sales of loans, other real estate owned, and mortgage-backed securities resulting from such issues to your liquidity and any related effects on the valuation and impairment of these assets.
With this letter in hand, it might make sense for CFOs as well as the CEO and board members to convene a meeting to go over the plan for the next financial crisis and pay heed to my advice back on Oct. 20.
“For starters, it might be a good time for management to look at their crisis management plans for dealing with financial risks, such as lack of liquidity and a credit crunch. Also, it might be a good time to for the CFO’s office to look at lining up other investments and types of liquidity in case this foreclosure crisis does indeed turn into another major financial crisis. Of course, it is up to the board to oversee how management is prepared for such a crisis. One suggestion I have is to reread my blog post of Jan. 8, 2010 (Top 10 Issues Facing Directors in 2010). In that post, there was a thorough list from Wachtel, Lipton, Rosen & Katz (Some Thoughts for Boards of Directors in 2010). Included in that list on page 7 is a link to a WLRK memo on risk management that offers a how to dealing with risk management issues related to a financial crisis (Risk Management and the Board of Directors, November 2009).”
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

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