Question

A-1) New Century originated high-risk mortgage loans, which they sold to investors with repurchase agreements. Let us assume the following series of transactions: #1) Originated $80 million in loans drawing on credit, with a 1.25% origination fee. #2) Sold the loans to investors for $82 million in cash, paying off the line drawn on to originate the loans. #3) Repurchased 40% of the origination from investors, drawing on credit, and now held for investment. NC paid investors a 2.5% premium on the repurchase. #4) 20% of the repurchased origination was in severe default and required an immediate writeoff. At the beginning of the year, NC had set-up an allowance for “held for investment” write-offs. What are the debits and credits for this series of typical transactions for NC?

Answer 1

1.	Loans receivable	80,000,000
	Origination	1,000,000
	Cash		81,000,000
2.	Cash	82,000,000
	Loans		80,000,000
	Gains on sale		2,000,000
3.	Origination	400,000
	Premium	10,000
	cash		410,000
4.	Allowance held for investment	80,000
	Impairment on Origination		80,000

Working Note

1. Origination = 80,000,000*1.25% = 1,000,000

Total cash = Loans receivable + Origination = 80,000,000 + 1,000,000 = 81,000,000

2. Gains on sale = Cash - Loans = 82,000,000 (received on sale) - 80,000,000 = 2,000,000

3. Repurchased origination = 1,000,000*40% = 400,000

Premium = 400,000 * 2.5% = 10,000

Cash = 400,000 + 10,000 = 410,000
4. Impairment on origination = 20% of repurchased origination = 400,000*20% = 80,000