NERA Economic Consulting Releases New Paper Examining Accounting Issues in Subprime Litigation

10 December 2007

New York/ 10 December 2007 -- A new white paper on the subprime meltdown released today by NERA Economic Consulting, a leading global provider of economic advice and analysis in business, legal, and regulatory matters, explores accounting issues cited in current litigation involving subprime mortgage originators.

In The Subprime Meltdown: Understanding Accounting-Related Allegations, NERA Senior Consultants Dr. Thomas Porter, CPA and Dr. Airat Chanyshev examine relevant accounting issues from current litigation involving mortgage originators. The authors cite specific allegations from recent court filings, explain the accounting rules and terminology in clear terms, and offer suggestions for how key stakeholders should analyze these critical issues.

For example, the estimate used to calculate the "fair value" of a loan can determine whether or not losses are recorded on an originator's income statement. However, because specific accounting guidance is not provided for how to estimate fair value, mortgage originators often use different methodologies to make that estimate. Therefore, it is critical that all parties involved understand the methodology that was actually used. Similarly, the authors note that the manner in which loan loss reserves are estimated will be a key element in subprime lawsuits.

Dr. Porter and Dr. Chanyshev also explain the nature of loan loss provisions, allowances for loan repurchase losses, and residual interest in securitization.

This paper is Part II in the NERA Insights: Subprime Lending Series, a series of papers dedicated to the analysis of the subprime lending crisis. Part I of the series, The Subprime Meltdown: A Primer, examined the economic factors leading to the deterioration of the US subprime mortgage industry, identified factors that differ between the current crisis and the 1998 crisis, and discussed pending and potential litigation issues arising from the current industry difficulties.

Forthcoming topics in this series will include the anatomy of a fraudulent conveyance and the economics of complex mortgage transactions.

NERA Economic Consulting (, founded in 1961 as National Economic Research Associates, is a unit of the Oliver Wyman Group, an MMC company.

About NERA

NERA Economic Consulting ( is a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. For more than six decades, we have been creating strategies, studies, reports, expert testimony, and policy recommendations for government authorities and the world’s leading law firms and corporations. We bring academic rigor, objectivity, and real-world industry experience to issues arising from competition, regulation, public policy, strategy, finance, and litigation.

NERA’s clients value our ability to apply and communicate state-of-the-art approaches clearly and convincingly, our commitment to deliver unbiased findings, and our reputation for quality and independence. Our clients rely on the integrity and skills of our unparalleled team of economists and other experts backed by the resources and reliability of one of the world’s largest economic consultancies. Continuing our legacy as the first international economic consultancy, NERA serves clients from major cities across North America, Europe, and Asia Pacific.