SEC Company Response from FLAGSTAR BANCORP INC (CIK 0001033012) — Aug 23, 2005
FLAGSTAR BANCORP INC (CIK 0001033012)
Date: Aug. 23, 2005 · CIK: 0001033012 · Accession: 0000950124-05-005130
AI Filing Summary & Sentiment
File numbers found in text: 001-16577
Referenced dates: December 21, 2004, December 21, 2004, July 7, 2005
Letter
[Flagstar Letterhead] August 23, 2005 Securities and Exchange Commission Division of Corporation Finance Mail Stop 4561 450 Fifth Street, N.W. Washington, D.C. 20549 Attention: Mr. Kevin Vaughn, Accounting Branch Chief
Re: Flagstar Bancorp, Inc. Form 10-K filed March 23, 2005 Supplemental Response dated March 22, 2005 File No. 001-16577
Dear Mr. Vaughn:
We are writing in response to your letter dated July 7, 2005 (the "Comment Letter") regarding our Annual Report on Form 10-K filed March 23, 2005. As our outside counsel discussed with Angela Jackson of your office, we did not receive the Comment Letter until Ms. Jackson provided it to us via facsimile on July 26, 2005 after we discovered its existence. This letter is being provided to you today pursuant to our subsequent request for an extension of time discussed with you by our outside legal counsel on August 19, 2005.
Please note that our responses below reflect our outside counsel's understanding with Ms. Jackson that we may defer any amendments to our prior filings with the Commission pending your review of this letter. In particular, we understand the Staff will review our responses below, as well as the Item 4 disclosure in our June 30, 2005 Form 10-Q filed on August 9, 2005, in considering whether any amendments to our 2004 Form 10-K and our March 31, 2005 Form 10-Q would be necessary.
Our responses to the Comment Letter are set forth below, in each case preceded by a reproduction of the corresponding comment.
Comment No. 1. We note your response to comment 17 from our letter dated December 21, 2004 and the revised disclosures included in your Form 10-K for the year ended December 31, 2004. Please advise us as follows with respect to the operations of Flagstar Credit Corporation:
o Your disclosure on page 76 of your December 31, 2004 Form 10-K indicates that as part of certain contractual arrangements, you provide performance guarantees on certain pools of loans which
<PAGE>
Mr. Kevin Vaughn August 23, 2005 Page 2
were underwritten and originated by you. Advise us as to whether these loans were subsequently sold in the secondary market;
o Tell us in detail how these reinsurance arrangements affect your accounting for loan sales under SFAS 140.
Response No. 1. The contractual arrangements referred to in Comment No. 1 of the Comment Letter are private mortgage re-insurance arrangements entered into by our subsidiary, Flagstar Credit Corporation ("Credit"), with unaffiliated insurance companies. Credit provides private mortgage insurance with respect to mortgage loans underwritten and originated by us. In all cases, a substantial portion of Credit's risk under these insurance policies is ceded to other mortgage insurance companies by way of these re-insurance arrangements. The re-insurers provide first loss coverage and coverage for losses over a stated maximum. Credit retains an intermediate tranche of insurance coverage. The performance guarantees described in our Form 10-K refer to Credit's retention of this intermediate tranche of insurance coverage. Management believes that Credit's exposure to risk of loss from this intermediate tranche of insurance coverage exists only in the event of catastrophic events which have a remote likelihood of occurrence. The Staff should note that no claim has ever been paid by Credit on these mortgage insurance policies.
Many of the mortgage loans for which Credit provides mortgage insurance are sold by us in the secondary market. We treat these sales as true sales for purposes of SFAS 140 because these loans are legally isolated notwithstanding the fact that our subsidiary provides policies of loan insurance on some of these loans.
All mortgage loans, whether or not insured by Credit, that we sell in secondary market transactions are sold under contractual arrangements that convey full title to the buyer. As a result, the transferred mortgage loans are fully isolated from us and from our creditors, even in a bankruptcy or other receivership situation. The buyer has the right to pledge or exchange the purchased loans and there is no condition that constrains that right. We do not maintain effective control of the loans through any agreement that either entitles or obligates us to repurchase or redeem the loans before their maturity or gives us the ability to unilaterally cause the purchaser to return the loans to us. The mortgage insurance policies provided by Credit do not constitute any type of retained interest in the sold mortgage loans. Consequently, we believe that all conditions under SFAS 140 are met with respect to the sale of these insured loans.
<PAGE>
Mr. Kevin Vaughn August 23, 2005 Page 3
Comment No. 2. In your response to comment 27 from our letter dated December 21, 2004, you indicated that loans sold to the Federal Home Loan Bank of Indianapolis (FHLBI) are done so on a non-recourse basis with no interests retained other than mortgage servicing rights. The FHLBI, however, states on their website (www.fhlbi.com) that under their Mortgage Purchase Program (MPP), "local institutions issue home mortgages and retain a major share of their credit risk while selling the mortgages to the FHLBI, which accepts the interest rate and warehousing risks." Please address the following:
o Tell us whether you share in the credit risk of those loans sold to the FHLBI and describe the nature of your risk-sharing arrangements and any retained interests;
o Tell us how you recorded any credit enhancements, recourse provisions or retained interests in your financial statements;
o Provide us sample journal entries that reflect how you record these credit enhancements and retained interests upon transfer and over the life of the loan;
o Tell us how you determined that these risk-sharing arrangements do not result in a retained interest in loans sold to the FHLBI;
o Tell us whether you pay fees to or receive fees from the FHLBI to provide credit enhancement on the loans sold, and if so, how you record those amounts;
o Tell us whether any of your insurance subsidiaries underwrite supplemental mortgage insurance that is used to provide credit enhancements on loans sold to the FHLBI. If so, clearly explain to us the terms of those arrangements and how they function;
o In your response you indicate that your loan sale agreements with the FHLBI are similar to loan agreements with Freddie, Fannie and other secondary market participants. Please tell us as to whether your loan sales to any of these other participants contain similar risk-sharing provisions or credit enhancement fee structures.
Response No. 2. When we sell loans to the FHLBI under their Mortgage Purchase Program ("MPP") we do not retain any credit risk with respect to these loans. We have no liability whatsoever to FHLBI with respect to payment or other defaults on these loans. To the extent the description of the MPP on the FHLBI website suggest otherwise, we believe it is simply incorrect.
<PAGE>
Mr. Kevin Vaughn August 23, 2005 Page 4 As noted in our previous response to the Staff, we do retain mortgage servicing rights ("MSRs") in mortgage loans sold by us to FHLBI. Under these MSRs we continue to service the sold mortgage loans and retain a servicing fee equal to 25 basis points of the unpaid principal balances.
In connection with the creation of each pool of mortgage loans sold by us under the MPP, FHLBI creates a Spread Lender Risk Account ("LRA") for our benefit which is maintained for a period of 11 years from the date the final loan of the pool is conveyed to FHLBI. Monthly contributions are made to the LRA out of regular principal and interest payments made to FHLBI on the mortgage loans in the pool until it is fully funded, typically in an amount equal to 0.30% of the outstanding principal balance of the underlying mortgage loans. Amounts in the LRA established for a particular pool of mortgage loans sold by us to FHLBI are available to FHLBI and its mortgage insurers to reimburse them for credit losses on the mortgage loans included in such pool only. Excess amounts in the LRA may be released to us from time to time, subject to the conditions stated in the loan sale agreement. Credit losses incurred by FHLBI (or mortgage insurers) in excess of amounts in the LRA may be rolled forward until additional contributions are made to the LRA, but are not recoverable from us. To the extent credit losses on the mortgage loans are reimbursed from the LRA it will reduce the amount potentially distributable to us from the LRA. However, in no event do we have any obligation to contribute funds to the LRA or any requirement to return any amounts previously distributed from the LRA to us. In our view, the potential loss of this highly contingent future benefit does not represent a credit risk to us or any type of significant retained interest in the underlying mortgage loans. Therefore, no entries are recorded at the date of sale or over the life of the loan.
We reflect the MSRs on our balance sheet as an asset which is amortized based upon the expected prepayment rate of the underlying loans. Mortgage servicing fees are recognized as income as earned.
We do not attribute any value to the LRA associated with a pool of loans sold under the MPP due to the highly subordinated and contingent nature of our right to receive future distributions of amounts placed in the LRA by FHLBI. We believe that all amounts in an LRA will likely be utilized to cover credit losses and, as a result, no distributions to us from the LRA are anticipated. Accordingly, we do not record an asset for an LRA and we do not recognize any income for an LRA until such time as cash is actually received by us from an
<PAGE>
Mr. Kevin Vaughn August 23, 2005 Page 5
LRA. Conversely, since we have no liability to fund and do not otherwise contribute to the LRA, no liability is recorded.
We pay for supplemental mortgage insurance to cover any losses exceeding those absorbed by the LRA and mortgage insurance maintained by FHLBI. The premium for this additional mortgage insurance is paid at closing in a single lump sum and is treated by us as a transaction expense that is netted against the sale proceeds. Neither we nor any of our affiliated companies pay any other fees to or receive fees from FHLBI to provide mortgage insurance or any other credit enhancement for the mortgage loans sold to FHLBI. Flagstar Credit Corporation does not underwrite supplemental mortgage insurance for any loans sold by us to FHLBI.
Our loan sales agreements with Freddie, Fannie and other secondary market participants do not contain an LRA or similar structures. However, our loan sales to Freddie, Fannie and other secondary market participants are similar in that they are true sale transactions with no recourse to us and the loans have been legally isolated for bankruptcy purposes.
Comment No. 3. In light of the significant recourse you appear to retain on loans sold FHLBI and the fact that you do not use a QSPE or other intermediary as part of that transfer, please tell us what evidence you obtained and provided to your auditors to support your assertion in your response to comment 27 that the loans were legally isolated. Accordingly, more clearly explain to us how you determined that you met all the criteria in paragraph 9 of SFAS 140 for sale treatment for loans sold to FHLBI. In future filings, please revise to clearly disclose how the loans transferred to the FHLBI meet each of the criteria for sale treatment set forth in paragraph 9 of SFAS 140.
Response No. 3. As discussed in our response to Comment No. 2 above, there is no significant recourse as a result of our loan sales to the FHLBI. Rather, the FHLBI looks to the LRA rather than us for the reimbursement in the case of credit loss.
The loan sales for which we retain the servicing rights and an interest in the LRA account are in fact true sales and the loans sold are legally isolated. Our contractual arrangements with FHLBI convey full title to FHLBI. As a result, the transferred mortgage loans are fully isolated from us and from our creditors, even in a bankruptcy or other receivership
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[Flagstar Letterhead]
August 23, 2005
Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 4561
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Mr. Kevin Vaughn, Accounting Branch Chief
Re: Flagstar Bancorp, Inc.
Form 10-K filed March 23, 2005
Supplemental Response dated March 22, 2005
File No. 001-16577
Dear Mr. Vaughn:
We are writing in response to your letter dated July 7, 2005 (the
"Comment Letter") regarding our Annual Report on Form 10-K filed March 23, 2005.
As our outside counsel discussed with Angela Jackson of your office, we did not
receive the Comment Letter until Ms. Jackson provided it to us via facsimile on
July 26, 2005 after we discovered its existence. This letter is being provided
to you today pursuant to our subsequent request for an extension of time
discussed with you by our outside legal counsel on August 19, 2005.
Please note that our responses below reflect our outside counsel's
understanding with Ms. Jackson that we may defer any amendments to our prior
filings with the Commission pending your review of this letter. In particular,
we understand the Staff will review our responses below, as well as the Item 4
disclosure in our June 30, 2005 Form 10-Q filed on August 9, 2005, in
considering whether any amendments to our 2004 Form 10-K and our March 31, 2005
Form 10-Q would be necessary.
Our responses to the Comment Letter are set forth below, in each case
preceded by a reproduction of the corresponding comment.
Comment No. 1. We note your response to comment 17 from our letter dated
December 21, 2004 and the revised disclosures included in your
Form 10-K for the year ended December 31, 2004. Please advise
us as follows with respect to the operations of Flagstar
Credit Corporation:
o Your disclosure on page 76 of your December 31, 2004
Form 10-K indicates that as part of certain
contractual arrangements, you provide performance
guarantees on certain pools of loans which
<PAGE>
Mr. Kevin Vaughn
August 23, 2005
Page 2
were underwritten and originated by you. Advise us as
to whether these loans were subsequently sold in the
secondary market;
o Tell us in detail how these reinsurance arrangements
affect your accounting for loan sales under SFAS 140.
Response No. 1. The contractual arrangements referred to in Comment No. 1 of
the Comment Letter are private mortgage re-insurance
arrangements entered into by our subsidiary, Flagstar Credit
Corporation ("Credit"), with unaffiliated insurance companies.
Credit provides private mortgage insurance with respect to
mortgage loans underwritten and originated by us. In all
cases, a substantial portion of Credit's risk under these
insurance policies is ceded to other mortgage insurance
companies by way of these re-insurance arrangements. The
re-insurers provide first loss coverage and coverage for
losses over a stated maximum. Credit retains an intermediate
tranche of insurance coverage. The performance guarantees
described in our Form 10-K refer to Credit's retention of this
intermediate tranche of insurance coverage. Management
believes that Credit's exposure to risk of loss from this
intermediate tranche of insurance coverage exists only in the
event of catastrophic events which have a remote likelihood of
occurrence. The Staff should note that no claim has ever been
paid by Credit on these mortgage insurance policies.
Many of the mortgage loans for which Credit provides mortgage
insurance are sold by us in the secondary market. We treat
these sales as true sales for purposes of SFAS 140 because
these loans are legally isolated notwithstanding the fact that
our subsidiary provides policies of loan insurance on some of
these loans.
All mortgage loans, whether or not insured by Credit, that we
sell in secondary market transactions are sold under
contractual arrangements that convey full title to the buyer.
As a result, the transferred mortgage loans are fully isolated
from us and from our creditors, even in a bankruptcy or other
receivership situation. The buyer has the right to pledge or
exchange the purchased loans and there is no condition that
constrains that right. We do not maintain effective control of
the loans through any agreement that either entitles or
obligates us to repurchase or redeem the loans before their
maturity or gives us the ability to unilaterally cause the
purchaser to return the loans to us. The mortgage insurance
policies provided by Credit do not constitute any type of
retained interest in the sold mortgage loans. Consequently, we
believe that all conditions under SFAS 140 are met with
respect to the sale of these insured loans.
<PAGE>
Mr. Kevin Vaughn
August 23, 2005
Page 3
Comment No. 2. In your response to comment 27 from our letter dated December
21, 2004, you indicated that loans sold to the Federal Home
Loan Bank of Indianapolis (FHLBI) are done so on a
non-recourse basis with no interests retained other than
mortgage servicing rights. The FHLBI, however, states on their
website (www.fhlbi.com) that under their Mortgage Purchase
Program (MPP), "local institutions issue home mortgages and
retain a major share of their credit risk while selling the
mortgages to the FHLBI, which accepts the interest rate and
warehousing risks." Please address the following:
o Tell us whether you share in the credit risk of those
loans sold to the FHLBI and describe the nature of
your risk-sharing arrangements and any retained
interests;
o Tell us how you recorded any credit enhancements,
recourse provisions or retained interests in your
financial statements;
o Provide us sample journal entries that reflect how
you record these credit enhancements and retained
interests upon transfer and over the life of the
loan;
o Tell us how you determined that these risk-sharing
arrangements do not result in a retained interest in
loans sold to the FHLBI;
o Tell us whether you pay fees to or receive fees from
the FHLBI to provide credit enhancement on the loans
sold, and if so, how you record those amounts;
o Tell us whether any of your insurance subsidiaries
underwrite supplemental mortgage insurance that is
used to provide credit enhancements on loans sold to
the FHLBI. If so, clearly explain to us the terms of
those arrangements and how they function;
o In your response you indicate that your loan sale
agreements with the FHLBI are similar to loan
agreements with Freddie, Fannie and other secondary
market participants. Please tell us as to whether
your loan sales to any of these other participants
contain similar risk-sharing provisions or credit
enhancement fee structures.
Response No. 2. When we sell loans to the FHLBI under their Mortgage Purchase
Program ("MPP") we do not retain any credit risk with respect
to these loans. We have no liability whatsoever to FHLBI with
respect to payment or other defaults on these loans. To the
extent the description of the MPP on the FHLBI website suggest
otherwise, we believe it is simply incorrect.
<PAGE>
Mr. Kevin Vaughn
August 23, 2005
Page 4
As noted in our previous response to the Staff, we do retain
mortgage servicing rights ("MSRs") in mortgage loans sold by
us to FHLBI. Under these MSRs we continue to service the sold
mortgage loans and retain a servicing fee equal to 25 basis
points of the unpaid principal balances.
In connection with the creation of each pool of mortgage loans
sold by us under the MPP, FHLBI creates a Spread Lender Risk
Account ("LRA") for our benefit which is maintained for a
period of 11 years from the date the final loan of the pool is
conveyed to FHLBI. Monthly contributions are made to the LRA
out of regular principal and interest payments made to FHLBI
on the mortgage loans in the pool until it is fully funded,
typically in an amount equal to 0.30% of the outstanding
principal balance of the underlying mortgage loans. Amounts in
the LRA established for a particular pool of mortgage loans
sold by us to FHLBI are available to FHLBI and its mortgage
insurers to reimburse them for credit losses on the mortgage
loans included in such pool only. Excess amounts in the LRA
may be released to us from time to time, subject to the
conditions stated in the loan sale agreement. Credit losses
incurred by FHLBI (or mortgage insurers) in excess of amounts
in the LRA may be rolled forward until additional
contributions are made to the LRA, but are not recoverable
from us. To the extent credit losses on the mortgage loans are
reimbursed from the LRA it will reduce the amount potentially
distributable to us from the LRA. However, in no event do we
have any obligation to contribute funds to the LRA or any
requirement to return any amounts previously distributed from
the LRA to us. In our view, the potential loss of this highly
contingent future benefit does not represent a credit risk to
us or any type of significant retained interest in the
underlying mortgage loans. Therefore, no entries are recorded
at the date of sale or over the life of the loan.
We reflect the MSRs on our balance sheet as an asset which is
amortized based upon the expected prepayment rate of the
underlying loans. Mortgage servicing fees are recognized as
income as earned.
We do not attribute any value to the LRA associated with a
pool of loans sold under the MPP due to the highly
subordinated and contingent nature of our right to receive
future distributions of amounts placed in the LRA by FHLBI. We
believe that all amounts in an LRA will likely be utilized to
cover credit losses and, as a result, no distributions to us
from the LRA are anticipated. Accordingly, we do not record an
asset for an LRA and we do not recognize any income for an LRA
until such time as cash is actually received by us from an
<PAGE>
Mr. Kevin Vaughn
August 23, 2005
Page 5
LRA. Conversely, since we have no liability to fund and do not
otherwise contribute to the LRA, no liability is recorded.
We pay for supplemental mortgage insurance to cover any losses
exceeding those absorbed by the LRA and mortgage insurance
maintained by FHLBI. The premium for this additional mortgage
insurance is paid at closing in a single lump sum and is
treated by us as a transaction expense that is netted against
the sale proceeds. Neither we nor any of our affiliated
companies pay any other fees to or receive fees from FHLBI to
provide mortgage insurance or any other credit enhancement for
the mortgage loans sold to FHLBI. Flagstar Credit Corporation
does not underwrite supplemental mortgage insurance for any
loans sold by us to FHLBI.
Our loan sales agreements with Freddie, Fannie and other
secondary market participants do not contain an LRA or similar
structures. However, our loan sales to Freddie, Fannie and
other secondary market participants are similar in that they
are true sale transactions with no recourse to us and the
loans have been legally isolated for bankruptcy purposes.
Comment No. 3. In light of the significant recourse you appear to retain on
loans sold FHLBI and the fact that you do not use a QSPE or
other intermediary as part of that transfer, please tell us
what evidence you obtained and provided to your auditors to
support your assertion in your response to comment 27 that the
loans were legally isolated. Accordingly, more clearly explain
to us how you determined that you met all the criteria in
paragraph 9 of SFAS 140 for sale treatment for loans sold to
FHLBI. In future filings, please revise to clearly disclose
how the loans transferred to the FHLBI meet each of the
criteria for sale treatment set forth in paragraph 9 of SFAS
140.
Response No. 3. As discussed in our response to Comment No. 2 above, there is
no significant recourse as a result of our loan sales to the
FHLBI. Rather, the FHLBI looks to the LRA rather than us for
the reimbursement in the case of credit loss.
The loan sales for which we retain the servicing rights and an
interest in the LRA account are in fact true sales and the
loans sold are legally isolated. Our contractual arrangements
with FHLBI convey full title to FHLBI. As a result, the
transferred mortgage loans are fully isolated from us and from
our creditors, even in a bankruptcy or other receivership