The Subprime Meltdown: Understanding Accounting-Related Allegations

06 December 2007
By Dr. Airat Chanyshev et al.

The subprime mortgage market -- which consists of loans to borrowers with high credit risk, and the mechanisms that have evolved to originate, service, and finance those loans -- is rapidly contracting due to mounting defaults and delinquencies. As a result, a number of accounting-related allegations have been made against mortgage originators in recent subprime lawsuits.

To address these matters from an economic perspective, NERA's Securities and Finance Practice has created NERA Insights: Subprime Lending Series, a series of papers dedicated to the analysis of the subprime lending crisis. Part II of the series, "The Subprime Meltdown: Understanding Accounting-Related Allegations," focuses on certain accounting issues that are cited in current litigation involving mortgage originators. The authors address questions related to loan loss provision, allowance for loan repurchase losses, and residual interest in securitization and provide suggestions for how to analyze the pertinent accounting issues in subprime lending cases.

In Part I of the series, "The Subprime Meltdown: A Primer," NERA Vice President Dr. Faten Sabry and former Consultant Dr. Thomas Schopflocher provide a brief overview of the subprime mortgage industry and the process of securitization. To learn more about the series, please contact Dr. Sabry.