FBR » Topics » Gain (Loss) on Sale of Loans, Net

These excerpts taken from the FBR 10-K filed Feb 29, 2008.

Gain (Loss) on Sale of Loans, Net

Gain (loss) on sale of loans is the difference between the sale proceeds and the net carrying amount of the loans less a provision for repurchase and premium recapture obligations and is recorded in mortgage banking net investment income in the consolidated statements of operations. Gain on sale of loans is recognized when the Company transfers ownership of the loan to the purchaser and the funds are collected. Loan sales are on a servicing-released basis. The Company reduces its gain on sale of loans to record liabilities (1) for loans sold which may be required to be repurchased due to breaches of representations and warranties or if a borrower fails to make one or more of the first loan payments due on the loan and (2) for premium recapture in instances where the sold loan is repaid within a specified period subsequent to sale.

Transfers of financial assets (mortgage loans) are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the loan has been isolated from the Company, (2) the transferee has the right (free of conditions that constrain it from taking advantage of

 

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FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands, except per share amounts)

 

that right) to pledge or exchange the transferred loan, and (3) the Company does not maintain effective control over the transferred loan through either (a) an agreement that both entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return the specific loan.

Gain (Loss) on Sale of Loans, Net

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Gain (loss) on sale of loans is the difference between the sale proceeds and the net carrying amount of the loans less a provision for repurchase and
premium recapture obligations and is recorded in mortgage banking net investment income in the consolidated statements of operations. Gain on sale of loans is recognized when the Company transfers ownership of the loan to the purchaser and the funds
are collected. Loan sales are on a servicing-released basis. The Company reduces its gain on sale of loans to record liabilities (1) for loans sold which may be required to be repurchased due to breaches of representations and warranties or if
a borrower fails to make one or more of the first loan payments due on the loan and (2) for premium recapture in instances where the sold loan is repaid within a specified period subsequent to sale.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Transfers of financial assets (mortgage loans) are accounted for as sales, when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the loan has been isolated from the Company, (2) the transferee has the right (free of conditions that constrain it from taking advantage of

 


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FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

STYLE="margin-top:6px;margin-bottom:0px" ALIGN="center">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FACE="Times New Roman" SIZE="2">(Dollars in thousands, except per share amounts)

 



that right) to pledge or exchange the transferred loan, and (3) the Company does not maintain effective control over the transferred loan through either
(a) an agreement that both entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return the specific loan.

STYLE="margin-top:18px;margin-bottom:0px; margin-left:2%">Investment Funds

The
Company’s subsidiary FBRIM, through various wholly-owned limited liability corporations, is the general partner, managing member, or manager of various hedge and private equity funds. Under the terms of the funds’ applicable governance
agreements, FBRIM can be removed as the general partner, managing member, or manager of these entities by a simple majority vote of the unaffiliated limited partners or non-managing members. Accordingly, the Company accounts for its investments in
these entities using the equity method of accounting.

The Company records allocations for its proportionate share of the earnings or
losses of certain hedge and private equity funds. Income or loss allocations are recorded in net investment income on principal investments in the consolidated statements of operations. The funds record their investments at fair value with changes
in fair value reported in the funds’ earnings at each reporting date. Accordingly, capital accounts at each reporting date include all applicable allocations of the funds’ realized and unrealized gains and losses.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The private investment funds are non-registered investment companies that record their investments in securities at fair value. Certain investments
consist of equity investments in securities of development-stage and early-stage privately and publicly held companies. The disposition of these investments may be restricted due to the lack of a ready market or due to contractual or regulatory
restrictions on disposition. In addition, these securities may represent significant portions of the issuer’s equity and carry special contractual privileges not available to other security holders. As a result of these factors, precise
valuation for the restricted public securities and private company securities is a matter of judgment, and the determination of fair value must be considered only an approximation and may vary significantly from the amounts that could be realized if
the investment were sold or from the value that would have been used had a ready market existed for the securities and those differences could be material.

FACE="Times New Roman" SIZE="2">Compensation

A significant component of compensation expense relates to incentive bonuses.
Incentive bonuses are accrued based on the contribution of key business units using certain pre-defined formulas. The Company’s compensation accruals are reviewed and evaluated on a quarterly basis.

STYLE="margin-top:18px;margin-bottom:0px; margin-left:2%">Stock-Based Compensation

The
Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). The Company adopted SFAS 123R on January 1, 2006 using the modified-prospective transition method.
SFAS 123R requires companies to recognize expense in the income statement for the grant-date fair value of awards of equity instruments to employees. Pursuant to SFAS 123R, expense is recognized over the period during which employees are required to
provide service. The expense is recorded using an estimated forfeiture of awards on the date of grant, rather than recognizing forfeitures as incurred as was permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS
123). Under the modified prospective transition method, compensation cost is recognized after the date of adoption for the portion of outstanding awards granted prior to the adoption of SFAS 123 for which service has not yet been rendered. In
addition, under the modified prospective transition method, results for year ended December 31, 2005 were not restated.

 


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FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

STYLE="margin-top:6px;margin-bottom:0px" ALIGN="center">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FACE="Times New Roman" SIZE="2">(Dollars in thousands, except per share amounts)

 


Prior to adopting SFAS 123R we presented the cash flows related to income tax deductions in excess of
compensation cost recognized on stock issued under restricted stock vesting and stock options exercised during the period as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123R requires excess benefits to be classified as
financing cash flows.

In addition, as a result of adopting SFAS 123R, certain balance sheet amounts associated with share-based
compensation costs have been reclassified within the equity section of the balance sheet. This change in presentation had no effect on our total equity. Effective January 1, 2006, deferred compensation (representing unearned costs of restricted
stock awards) and Common stock issuable are presented on a net basis as a component of Additional paid-in capital.

Prior to the adoption
of SFAS 123R, the Company accounted for stock-based compensation in accordance with SFAS 123. Pursuant to SFAS 123, the Company continued to apply the provisions of Accounting Principles Board Opinion (APB) No. 25, “Accounting for
Stock Issued to Employees” (APB 25). Under APB 25, compensation expense was recorded for the difference, if any, between the fair market value of the common stock on the date of grant and the exercise price of the option.

STYLE="margin-top:18px;margin-bottom:0px; margin-left:2%">Sales of Subsidiary Shares

SIZE="2">The Company accounts for sales of stock by its subsidiaries in accordance with Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock of a Subsidiary” (SAB 51). Pursuant to SAB 51, the Company recognizes gains and
losses on issuances of subsidiary stock in the statement of operations.

EXCERPTS ON THIS PAGE:

10-K (2 sections)
Feb 29, 2008
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