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11.2A Accounting for mortgage loans upon foreclosure – before adoption of ASU 2022-02
Publication date: 31 May 2022
us Loans & investments guide
ASC 310-40, Troubled Debt Restructurings by Creditors, provides guidance on the classification of residential real estate acquired that served as collateral to a mortgage loan and the classification of certain government-guaranteed mortgage loans upon foreclosure. This guidance applies to all creditors.
11.2A.1 Foreclosure of residential real estate collateralized loans – before adoption of ASU 2022-02
When a creditor receives physical possession of residential real estate property that collateralized a mortgage loan (through an in substance repossession or foreclosure), it should derecognize the loan receivable and recognize the real estate property. ASC 310-40-55-10A provides guidance on when a creditor is considered to have received physical possession of such real estate property related to consumer mortgage loans.
A creditor is considered to have received physical possession (resulting from an in substance repossession or foreclosure) of residential real estate property collateralizing a consumer mortgage loan only upon the occurrence of either of the following:
- The creditor obtains legal title to the residential real estate property upon completion of a foreclosure. A creditor may obtain legal title to the residential real estate property even if the borrower has redemption rights that provide the borrower with a legal right for a period of time after a foreclosure to reclaim the real estate property by paying certain amounts specified by law.
- The borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The deed in lieu of foreclosure or similar legal agreement is completed when agreed-upon terms and conditions have been satisfied by both the borrower and the creditor.
In many legal jurisdictions, a borrower has a legal right to reclaim a foreclosed real estate property, for some period of time, by paying an amount specified by law. A creditor should not wait until this redemption period has expired to reclassify a consumer mortgage loan to residential real estate. The creditor obtains physical possession when it obtains legal title because it generally has the right to sell the property subject to the borrower’s right of redemption.
Foreclosed or repossessed real estate should be presented on the balance sheet as a separate amount or included in other assets and disclosed in the notes to the financial statements. ASC 310-10-50 also requires a creditor to disclose (1) the carrying amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure.
11.2A.2 Foreclosure of government guaranteed mortgage loans – before adoption of ASU 2022-02
As discussed in ASC 310-40-40-7A, upon the foreclosure on property collateralizing a government-guaranteed mortgage loan, a creditor should derecognize the government-guaranteed mortgage loan and recognize either a real estate asset or a standalone government guarantee receivable (if certain conditions are met). Government-guaranteed mortgage loans include loans guaranteed by the Federal Housing Administration (FHA), the US Department of Housing and Urban Development (HUD), or the US Department of Veterans Affairs (VA). A government loan guarantee entitles the creditor to recover all or a portion of the unpaid principal balance from the governmental entity upon a borrower default on the loan.
A guaranteed mortgage loan receivable shall be derecognized and a separate other receivable shall be recognized upon foreclosure (that is, when a creditor receives physical possession of real estate property collateralizing a mortgage loan in accordance with the guidance in paragraph 310-40-40-6) if the following conditions are met:
- The loan has a government guarantee that is not separable from the loan before foreclosure.
- At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim. A creditor would be considered to have the ability to recover under the guarantee at the time of foreclosure if the creditor determines that it has maintained compliance with the conditions and procedures required by the guarantee program.
- At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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