Savior ORE Flashcards
How is OREO booked?
Should be booked at time of foreclosure at fair value of property less cost to sell the property. Any loss should be charged to allowance for loan and lease losses. Excess should be reported as a recovery of prior charge-off or current earnings, as appropriate. If partial satisfaction of loan, loan should be reduced by fair value of property less costs to sell. Legal and other direct expenses incurred by the bank in foreclosure should be included in expenses when they are incurred.
What are the three major phases of the ORE life cycle?
1) Acquisition (FAS 15 and 144)
2) Holding period ( FAS 34 and 67)
3) Disposition (FAS 66)
Financed Sales of Other Real Estate - Full Accrual Method
- Full Accrual Method – disposition is recorded as a sale, the asset resulting from the seller’s financing of the transaction is reported as a loan, and a profit recognized immediately but 4 things have to be met:
a) Sale consummated
b) Receivable is not subject to future subordination
c) Usual risks and rewards of ownership have been transferred
d) Buyer’s initial investment and continuing investment are adequate to demonstrate a commitment to pay for the property
Financed Sales of Other Real Estate - Installment Method
- Installment Method – STRONG BORROWER - recognizes a sale and corresponding loan, profits are recorded as the bank receives payments; interest income is recognized on an accrual basis.
Used when down payment is not adequate for full accrual method, but recovery of cost of property is reasonably assured.
Factors that should be considered for recovery assurance include:
a) Down payment size
b) LTV ratios
c) Projected cash flow from property
d) Recourse provisions
e) Guarantees
f) Pledging additional collateral
Financed Sales of Other Real Estate - Cost Recovery Method
- Cost Recovery Method – WEAK BORROWER - recognizes a sale and corresponding loan, but income recognition is deferred, and may apply when dispositions do not qualify under full accrual or installment methods. Principal payments are applied as a reduction of the loan balance and interest increases the unrecognized gross profit. No profit or interest income is recognized until the aggregate payments exceed the recorded amount of the loan. The loan is maintained on nonaccrual status while this method is used.
Financed Sales of Other Real Estate - Reduced-Profit Method
- Reduced-Profit Method – Method is appropriate in those situations where the bank receives an adequate down payment, but the loan amortization schedule does not meet the requirements of the full accrual method. Profits recognized as payments are received; however, profit recognition (or apportionment method) is based on the present value of the lowest level of periodic payments required under the loan agreement. (rarely used)
Financed Sales of Other Real Estate - Deposit Method
Deposit Method – Used in situations where a sale of real estate has not been consummated. Continues to be reported as other real estate. Payments received from the borrower are reported as a liability until sufficient payments or other events have occurred which allow the use of one of the other methods. No profit or interest income is recognized.
Where are Other Real Estate Reserves included in capital?
• Not included - in Tier 1, Tier 2, or RBC
• Valuation Allowances - On an asset-by-asset basis and netted from the asset’s cost to determine the gross amount for classification.
• General Reserves - Contra-asset to ORE and netted from the ORE category in the statement of condition.
To the degree general reserves adequately cover the risks inherent in the other real estate portfolio as a whole, the amount of other real estate assets classified Loss will not need to be deducted from Tier 1 capital.
