Chapter 3 Flashcards

Question

Acquiring Mortgage Loans Through | Secondary Markets

Answer 1

Buying participation in a block of existing loans or buying existing loans from another life insurance company or another financial institution.

Answer 2

Obtaining a block of loans when it acquires or merges with another life insurance company.

Answer 3

Receiving loans in lieu of cash from ceding insurance companies to fund policy reserves on policies acquired by the reinsurer in a reinsurance transaction.

Answer 4

Historically, mortgage bankers and direct placements were primary sources of new mortgage loans. However, with the advent of secondary market activities, bond brokerage houses and investment bankers have entered the field of selling and placing mortgages.

Answer 5

Life insurers have increased sharing loans with other life insurers to take part in larger projected loans while spreading risks and diversifying types of loans (i.e., shopping centers, office towers, etc.).

Answer 6

Essentially these are pass-through certificates whereby a trustee holds all mortgage documents in trust, sells off interests in the underlying mortgages, collects the mortgage payments, and remits its portion to each holder. The GNMA is probably the most widely recognized issuer of this type of mortgage interest. Another kind of instrument is the CMO.

Answer 7

The amount recorded as the initial investment in a loan is the consideration given for the loan. * This consideration is the principal amount of the loan, net of deferred loan origination and commitment fees. This difference in rates generates either a premium or a discount. A premium occurs when the amount paid for the loan is more than the principal of the existing loan. A discount occurs when the principal of the existing loan is more than the amount paid for the loan.This premium is amortized or the discount is accrued over the remaining life of the loan, the period of time until total principal proceeds of the loan are received in cash.

Answer 8

The major costs to a company that originates its loans directly are the salaries and expenses of personnel in the Investment Department who underwrite the loan and represent the company in the loan transaction. These salaries and expenses are treated as period costs and are expensed as incurred. When loans are obtained from a mortgage banker, the mortgage banker will usually charge a fee, expressed as a percent of the loan principal amount, for underwriting and originating the loan. This

Answer 9

The only income generated through an initial investment in mortgage loans, is the commitment fee that the company might receive for issuing the commitment letter obligating the company to make the loan. Such a fee reimburses the company for its expenses in originating the loan. * Loan origination fees represent fees charged the borrower for originating, refinancing or restructuring a loan. Loan origination fees may include charges for points, management, arrangement, placement, application, and underwriting, to name a few.

Answer 10

functions are split between the 1. Accounting Department and 2. the Investment Department.

Answer 11

* processes and records all receipts of commitment fees, principal, interest, equity participations, late fees, prepayment penalties, extension fees, other income, and escrow funds. * reviews, approves, and makes disbursements for and records all expenses, escrow funds (principally payments of real estate taxes and insurance premiums), and loan principal related to the investment in loans and foreclosed property. Accounting department is responsible for: • Supplying the Investment Department with correct data and reports that summarize all loan transactions. * Alerting the Investment Department promptly whenever an exception to the normal processing routine occurs. * Design, maintenance, and accuracy of accounting records, for periodic management and exception reports, and for statutory statement preparation.

Answer 12

The Investment Department is responsible for promptly supplying the Accounting Department with: * Accounting data on new loans * Data related to changes in existing loans, which affects the accounting function. * Resolving all exceptions reported to it by the Accounting Department, i.e., when a borrower defaults on a loan payment.

Answer 13

The contract between the company and servicer should provide that the: • Company can periodically audit the servicer’s records and files pertaining to the loans owned by the company. In lieu of making the audit, the company can agree to receive an annual audit report pertaining to its loans from the servicer’s independent certified public accountants. * This is the single audit concept. * Servicer must have a fidelity bond and an errors and omission policy of stipulated minimum amounts. * Servicer must have an annual independent audit, with a copy of the audited financial statements sent to the company within a certain period of time after the end of the servicer’s fiscal year.

Answer 14

* processing transactions: which are recurring and similar in nature for all mortgage loans * special transactions.

Answer 15

Recording Principal Receipts - Mortgage loan balances are usually amortized on a monthly basis over the term of the loan.

Answer 16

Interest income is recorded as earned. Interest due but not received at the end of the accounting period is accrued into income. Interest received before it is due is not reflected as income until earned and is recorded as unearned investment income.

Answer 17

includes interest income accrued collected, change in interest due and accrued, change in unearned investment income plus amortization of premiums, deferred fees and accrual of discounts. When a loan is in default, interest should be accrued if deemed collectible. If a loan in default has interest income due and accrued 180 days past due and collectible, investment income continues to accrue but interest is reported as non-admitted. Interest continues to be accrued until deemed uncollectible, at which time the accrued interest is written off against investment income and no longer accrued.

Answer 18

Escrow accounts constitute funds collected monthly from the borrower and held for ultimate payment of taxes and insurance. * Separate bank account or a trust bank account may be opened. with all escrow receipts deposited into it to prevent commingling of escrow funds with a company’s operating funds. * Tust bank : If escrow funds are deposited in a segregated trust bank account are recoded as separate assets in the statutory statement (not recorded as cash on deposit) Separate Nontrust bank : Escrow funds deposited in separate nontrust bank accounts are recorded as cash on deposit. The liability for such escrow funds, whether credited as cash or a separate account, is recorded as an amount withheld or retained by the company as agent or trustee liability.

Answer 19

Trouble Debt restructuring - is defined as a debt restructuring whereby the insurer for economic or legal reasons related to borrower financial difficulties, grants a concession to the debtor that it would not otherwise grant. Fair value for a non-collateral dependent loan is determined in accordance with the NAIC Purposes and Procedures of the Securities Valuation Office or the present value of future cash flows. If a loss is recorded the amount of the interest accrued included in the loss is reversed and recorded as a charge to interest income.

Answer 20

*An environmental review of the property which the company would order depending on the age, history of usage, location, and other factors.

Answer 21

``` Secondary Markets Mergers Reinsurance Brokers Participating or Joint Venture Loans Participation Certificates ```

Answer 22

Exhibit of Net Investment Income Earned income consists of collected income, change in due and accrued income, change in unearned income including amortization or accretion. Uncollectible investment income due and accrued is written off and charged to investment income. Exhibit of Capital Gains and Losses • Realized capital gains and (losses): Realized gains and losses from the sale, foreclosure, or write downs for other than temporary impairments to the recorded investment of mortgage loans are reported in realized capital gains and (losses). • Unrealized gains and losses relating to the adjustments to the statement value for recognizing an impairment of a mortgage loan by creating or adjusting a valuation allowance for an impaired loan are reported in unrealized gains and (losses). Expenses related to mortgage loans are reported in general expenses.

Answer 23

Summaries of all transactions that affect the principal balance of mortgage loans during the year are broken out by type of loan in Schedule B, which also provides analyses, by type, of the number and of the recorded investment of mortgage loans by location (state or foreign country) of the mortgaged property. Other sections of this schedule give detailed information on the following: loans with interest overdue more than 3 months not in the process of foreclosure at the end of the year; and mortgages in the process of foreclosure at the end of the year. Schedule B, Part 2, provides analyses of mortgage loans sold, transferred or paid in full by loan, the recorded investment at disposition, consideration received and profit/loss on sale. Schedule B also presents information related to the appraised values of mortgaged property held as security for loans, to loans on which property taxes are delinquent, and to certain mortgage loans where the borrower is an officer, director, parent, subsidiary, or affiliate of the reporting life insurance company. The information contained in Schedule B is also used in computing a company’s Risk-Based Capital (RBC). Additionally, Investment Risk Interrogatories are required as a supplement to the Annual Statement to be filed by April 1. These Investment Risk Interrogatories require mortgage information for amount and percentage of the total admitted assets held of each of the ten largest aggregate mortgage interests, loan to value ratio categories, and types of mortgages.

Answer 24

* These are securities whose underlying assets consist of commercial mortgage loans. The commercial loans are pooled, which brings diversification and liquidity to the asset class. * There are many different sources of CMBS. Conduits and aggregate pools generally consist of loans newly originated, purchased or held by investment bankers until the pool is large enough for an efficient execution. Government agencies such as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp. (FHLMC) are important sources of residential financing.

Answer 25

* Indicates the lender’s commitment to make a loan in accordance with the terms specified either in the borrower’s loan application or in the terms the company approves for the loan. The letter and loan application together represent the contract. In many cases, companies receive a fee for issuing commitment letters.Nonrefundable commitment fees are deferred. If the commitment is exercised, the fees are deferred and amortized over the life of the loan. If the commitment is not exercised, the fees are credited to income on the commitment expiration date.

Answer 26

* Subsequent to the funding of a loan, the three most common documents obtained are: 1) new or updated appraisals as evidence of the current value of the property; 2) current financial statements on the borrower or the property, if the property is income producing, as evidence of the borrower’s continuing financial strength and of the property’s continuing ability to produce income; and 3) periodic inspection reports as evidence of the physical condition of the property.

Answer 27

* Generally, a company earns a servicing fee when it retains the servicing of a block of loans in which it has sold all or part of the block. Service fees received from sales of participations are recorded as gross income and not netted against interest income remitted to the acquiring party.

Answer 28

A company that has its loan serviced is usually charged a servicer's fee. * The servicer’s fee is usually expressed as an annual fraction of a percent of the principal balance of the loans or based on a percentage of each interest payment. Fee is collected periodically and deducted from the amount of principal and interest collections remitted by the servicer. If the servicing agent reports interest income net of servicing costs, interest due and accrued is reported net of servicing costs. If the servicing agent reports interest gross, interest due and accrued is reported gross, with a liability recorded to reflect the servicing cost accrual.

Answer 29

this type of income does not relate directly to the unpaid principal balance. *Generally, it is an income stream due the company and is based upon the financial results of the borrower and/or borrowing business entity. Although it can take several forms, two of the more prominent ones are: * *Participation in revenue generated by the mortgaged property above a specified sum, such as a percentage of gross sales in excess of a specified dollar volume. * *Participation in profits from the mortgaged property, such as a percentage of gross income less defined expenses. * ADC are lending agreements in which the lender participates in expected residual profits. Expected residual profit (called interest or another name such as equity kicker) is the profit above the reasonable amount of interest and fees expected to be earned by the lender. • >50% of the expected residual profits the ADC arrangement is classified and accounted for as investment real estate • 50% or less of the expected residual profits, the ADC arrangement is classified as a loan or a real estate joint venture.

Answer 30

* Expenses, other than those related to foreclosure of loans, are normally considered overhead whether the company is servicing the loan directly or having the loan serviced by others. They are expensed as incurred.

Answer 31

When foreclosed, the cost of the property is transferred from the mortgage loan account to the real estate account. Foreclosure costs can include legal fees, payments of unpaid real estate taxes, other direct expenses incurred to protect the investment or obtain clear title to the property, and accrued interest receivable at foreclosure. *The company does not capitalize all foreclosure expenses. These costs are only capitalized to the extent deemed recoverable from the ultimate disposition of the property, otherwise these costs are expensed as incurred. If the fair value of the real estate is less than the carrying value, a write down is recognized as a mortgage realized capital loss. If a loss is recognized at foreclosure, the amount of interest accrued included in the loss is reversed, and recorded as a charge to interest income.

Answer 32

* accrued interest is nonadmitted if a mortgage in default has investment income due and accrued 180 days past due and collectible.

Answer 33

* SSAP No. 33 “Securitization” (“SSAP No. 33”) provides statutory accounting guidance for securitizations of financial assets. An asset securitization converts assets which would normally serve as collateral for a loan into securities. A securitization is accounted for as a sale when the transferor surrenders control over the financial assets transferred. Gain or loss is recognized only to the extent that consideration, other than beneficial interests in the transferred assets, is received in exchange. A sale is not recognized for the portion of the securitization for which beneficial interests in the transferred assets are received. This transaction is treated as an exchange of assets with no measurement of a gain or loss.

Answer 34

* Notes To Financial Statements provide additional valuable information on the loans. Some of the more significant information provided includes 1) The valuation of the mortgage loan portfolio, including a description of the valuation basis for mortgage loans and income recognition. 2) The recorded investment and interest past due on mortgages with interest more than 180 days past due. 3) The recorded investment and number of mortgages on which interest has been reduced, and the percent the interest was reduced. 4) Disclosures of impaired loans: The total recorded investment in impaired loans at the end of each period a) For each period for which results of operations are presented, the average recorded investment in the impaired loans during each period, the related amount of interest income recognized on impaired loans. b) For each period for which results of operations are presented, the activity in the allowance for credit losses account

Chapter 3 Flashcards

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