SECURITY
NATIONAL FINANCIAL CORPORATION
5300
South 360 West, Suite 250
Salt
Lake City, Utah 84123
Telephone
(801) 264-1060
February
20, 2009
VIA
EDGAR
U. S.
Securities and Exchange Commission
Division
of Corporation Finance
100 F
Street, N. E., Mail Stop 4561
Washington,
D. C. 20549
Attn: Sharon
M. Blume
Assistant Chief Accountant
Re: Security
National Financial Corporation
Form 10-K for the Fiscal Year Ended
December 31, 2007
Form 10-Q for Fiscal Quarter Ended June
30, 2008
File No. 0-9341
Dear Ms.
Blume:
Security
National Financial Corporation (the “Company”) hereby supplements its responses
to its previous response letters dated January 15, 2009, November 6, 2008 and
October 9, 2008. These supplemental responses are provided as
additional information concerning the Company’s mortgage loan operations and the
appropriate accounting that the Company follows in connection with such
operations.
The
Company operates its mortgage loan operations through its wholly owned
subsidiary, SecurityNational Mortgage Company (“SNMC”). SNMC currently has 29
branch offices across the continental United States and Hawaii. Each
office has personnel who are qualified to solicit and underwrite loans that are
submitted to SNMC by a network of mortgage brokers. Loan files submitted to SNMC
are underwritten pursuant to third-party investor guidelines and are approved to
fund after all documentation and other investor-established requirements are
determined to meet the criteria for a saleable loans. Loan documents are
prepared in the name of SNMC and then sent to the title company handling the
loan transactions for signatures from the borrowers. Upon signing the documents,
requests are then sent to the warehouse bank involved in the transaction to
submit funds to the title company to pay for the settlement. All loans funded by
warehouse banks are committed to be purchased (settled) by third-party investors
under pre-established loan purchase commitments. The initial recordings of the
deeds of trust (the mortgages) are made in the name of SNMC.
Soon
after the loan funding, the deeds of trust are assigned, using the Mortgage
Electronic Registration System (“MERS”), which is the standard in the industry
for recording subsequent transfers in title, and the promissory notes are
endorsed in blank to the warehouse bank that funded the loan. The promissory
notes and the deeds of trust are then forwarded to the warehouse bank. The
warehouse bank funds approximately 96% of the mortgage loans to the title
company and the remainder (known in the industry as the “haircut”) is funded by
the Company. The Company records a receivable from the third-party investor for
the portion of the mortgage loans the Company has funded and for mortgage fee
income earned by SNMC. The receivable from the third-party investor is unsecured
inasmuch as neither the Company nor its subsidiaries retain any interest in the
mortgage loans.
Conditions
for Revenue Recognition
Pursuant to paragraph 9 of SFAS 140, a
transfer of financial assets (or a portion of a financial asset) in which the
transferor surrenders control over those financial assets shall be accounted as
a sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. The transferor has surrendered
control over transferred assets if and only if all of the following conditions
are met:
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(a)
The transferred assets have been isolated from the transferor―placed
presumptively beyond the reach of the transferor and its creditors, even in
bankruptcy or other receivership.
SNMC
endorses the promissory notes in blank, assigns the deeds of trust through MERS
and forwards these documents to the warehouse bank that funded the loan.
Therefore, the transferred mortgage loans are isolated from the Company. The
Company's management is confident that the transferred mortgage loans are beyond
the reach of the Company and its creditors.
(b) Each
transferee (or, if the transferee is a qualified SPE, each holder of its
beneficial interests) has the right to pledge or exchange the assets (or
beneficial interests) it received, and no condition restricts the transferee (or
holder) from taking advantage of its right to pledge or exchange and provides
more than a trivial benefit to the transferor.
The
Company does not have any interest in the promissory notes or the underlying
deeds of trust because of the steps taken in item (a) above. The Master Purchase
and Repurchase Agreements (the “Purchase Agreements”) with the warehouse banks
allow them to pledge the promissory notes as collateral for borrowings by them
and their entities. Under the Purchase Agreements, the warehouse banks have
agreed to sell the loans to the third-party investors; however, the warehouse
banks hold title to the mortgage notes and can sell, exchange or pledge the
mortgage loans as they choose. The Purchase Agreements clearly indicate that the
purchaser, the warehouse bank, and seller confirm that the transactions
contemplated herein are intended to be sales of the mortgage loans by seller to
purchaser rather than borrowings secured by the mortgage loans. In the event
that the third-party investors do not purchase or settle the loans from the
warehouse banks, the warehouse banks have the right to sell or exchange the
mortgage loans to the Company or to any other entity. Accordingly, the Company
believes this requirement is met.
(c)
The transferor does not maintain effective control over the transferred
asset through either an agreement that entitles both entities and obligates the
transferor to repurchase or redeem them before their maturity or the ability to
unilaterally cause the holder to return the specific assets, other than through
a cleanup call.
The
Company maintains no control over the mortgage loans sold to the warehouse
banks, and, as stated in the Purchase Agreements, the Company is not entitled to
repurchase the mortgage loans. In addition, the Company cannot unilaterally
cause a warehouse bank to return a specific loan. The warehouse bank can require
the Company to repurchase mortgage loans not settled by the third-party
investors, but this conditional obligation does not provide effective control
over the mortgage loans sold. Should the Company want a warehouse bank to sell a
mortgage loan to a different third-party investor, the warehouse bank would
impose its own conditions prior to agreeing to the change, including, for
instance, that the original intended third-party investor return the promissory
note to the warehouse bank. Accordingly, the Company believes that it does not
maintain effective control over the transferred mortgage loans and that it meets
this transfer of control criteria.
The
warehouse bank and not the Company transfers the loan to the third-party
investor at the date it is settled. The Company does not have an unconditional
obligation to repurchase the loan from the warehouse bank nor does the Company
have any rights to purchase the loan. Only in the situation where the
third-party investor does not settle and purchase the loan from the warehouse
bank does the Company have a conditional obligation to repurchase the loan.
Accordingly, the Company believes that it meets the criteria for recognition of
mortgage fee income under SFAS 140 when the loan is funded by the warehouse bank
and, at that date, the Company records an unsecured receivable from the investor
for the portion of the loan funded by the Company, which is typically 4% of the
face amount of the loan, together with the broker and origination fee
income.
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Loans
Repurchased from Warehouse Banks
Historically,
99% of all mortgage loans are settled with investors. In the process of settling
a loan, the Company may take up to six months to pursue remediation of an
unsettled loan. There are situations when the Company determines that it is
unable to enforce the settlement of a loan by the third-party investor and that
it is in the Company’s best interest to repurchase the loan from the warehouse
bank. Any previously recorded mortgage fee income is reversed in the
period the loan was repurchased.
When the
Company repurchases a loan, it is recorded at the lower of cost or market. Cost
is equal to the amount paid to the warehouse bank and the amount originally
funded by the Company. Market value is often difficult to determine for this
type of loan and is estimated by the Company. The Company never estimates market
value to exceed the unpaid principal balance on the loan. The market value is
also supported by the initial loan underwriting documentation and collateral.
The Company does not hold the loan as available for sale but as held to maturity
and carries the loan at amortized cost. Any loan that subsequently becomes
delinquent is evaluated by the Company at that time and any allowances for
impairment are adjusted accordingly.
This will
supplement our earlier responses to clarify that the Company repurchased the
$36,291,000 of loans during 2007 and 2008 from the warehouse banks and not from
third-party investors. The amounts paid to the warehouse banks and the amounts
originally funded by the Company, exclusive of the mortgage fee income that was
reversed, were classified as the cost of the investment in the mortgage loans
held for investment.
The
Company uses two allowance accounts to offset the reversal of mortgage fee
income and for the impairment of loans. The allowance for reversal of mortgage
fee income is carried on the balance sheet as a liability and the allowance for
impairment of loans is carried as a contra account net of our investment in
mortgage loans. Management believes the allowance for reversal of mortgage fee
income is sufficient to absorb any losses of income from loans that are not
settled by third-party investors. The Company is currently accruing 17.5 basis
points of the principal amount of mortgage loans sold, which increased by 5.0
basis points during the latter part of 2007 and remained at that level during
2008.
The
Company reviewed its estimates of collectability of receivables from broker and
origination fee income during the fourth quarter of 2007, in view of the market
turmoil discussed in the following paragraph and the fact that several
third-party investors were attempting to back out of their commitments to buy
(settle) loans, and the Company determined that it could still reasonably
estimate the collectability of the mortgage fee income. However, the Company
determined that it needed to increase its allowance for reversal of mortgage fee
income as stated in the preceding paragraph.
Effect
of Market Turmoil on Sales and Settlement of Mortgage Loans
As
explained in previous response letters, the Company and the warehouse banks
typically settle mortgage loans with third-party investors within 16 days of the
closing and funding of the loans. However, beginning in the first quarter of
2007, there was a lot of market turmoil for mortgage backed securities.
Initially, the market turmoil was primarily isolated to sub-prime mortgage loan
originations. The Company originated less than 0.5% of its mortgage loans using
this product during 2006 and the associated market turmoil did not have a
material effect on the Company.
As 2007
progressed, however, the market turmoil began to expand into mortgage loans that
were classified by the industry as Alt A and Expanded Criteria. The
Company's third-party investors, including Lehman Brothers (Aurora Loan
Services) and Bear Stearns (EMC Mortgage Corp.), began to have difficulty
marketing Alt A and Expanded Criteria loans to the secondary markets. Without
notice, these investors changed their criteria for loan products and refused to
settle loans underwritten by the Company that met these investor’s previous
specifications. As stipulated in the agreements with the warehouse banks, the
Company was conditionally required to repurchase loans from the warehouse banks
that were not settled by the third-party investors.
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Beginning
in early 2007, without prior notice, these investors discontinued purchasing Alt
A and Expanded Criteria loans. Over the period from April 2007 through May 2008,
the warehouse banks had purchased approximately $36.2 million of loans that had
met the investor’s previous criteria but were rejected by the investor in
complete disregard of their contractual commitments. Although the
Company pursued its rights under the investor contracts, the Company was
unsuccessful due to the investors’ financial problems and could not enforce the
loan purchase contracts. As a result of its conditional repurchase obligation,
the Company repurchased these loans from the warehouse banks and reversed the
mortgage fee income associated with the loans on the date of repurchase from the
warehouse banks. The loans were classified to the long-term mortgage loan
portfolio beginning in the second quarter of 2008.
Relationship
with Warehouse Banks
As
previously stated, the Company is not unconditionally obligated to repurchase
mortgage loans from the warehouse banks. The warehouse banks purchase the loans
with the commitment from the third-party investors to settle the loans from the
warehouse banks. Accordingly, the Company does not make an entry to reflect the
amount paid by the warehouse bank when the mortgage loans are funded. Upon sale
of the loans to the warehouse bank, the Company only records the receivables for
the brokerage and origination fees and the amount the Company paid at the time
of funding.
Interest
in Repurchased Loans
Once a
mortgage loan is repurchased, it is immediately transferred to mortgage loans
held for investment (or should have been) as the Company makes no attempts to
sell these loans to other investors at this time. Any efforts to find a
replacement investor are made prior to repurchasing the loan from the warehouse
bank. The Company makes no effort to remarket the loan after it is
repurchased.
Acknowledgements
In
connection with the Company’s responses to the comments, the Company hereby
acknowledges as follows:
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The
Company is responsible for the adequacy and accuracy of the disclosure in
the filing;
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The
staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the
filing; and
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The
Company may not assert staff comments as defense in any proceeding
initiated by the Commission or any person under the Federal Securities
Laws of the United States.
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If you
have any questions, please do not hesitate to call me at (801) 264-1060 or (801)
287-8171.
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Very
truly yours,
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| /s/ Stephen M. Sill | |
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Stephen
M. Sill, CPA
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Vice
President, Treasurer and
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Chief
Financial Officer
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