Question

Credit Union is a small, regional financial institution with a loyal customer base. Like most financial institutions Randolph has a significant portfolio of home mortgages. Because of the nature of its operations, the risks relating to these mortgages are geographically concentrated. To reduce this risk, the credit union securitized$30 million of mortgages receivable for proceeds of $29.5 million. Under the securitization arrangement, investors in the mortgage-backed securities bear the cost of any defaults on the mortgages. Randolph's only continuing involvement in the mortgages is the administration of the cash receipts and the transfer of that cash to the investors. Requirements a. Should Randolph record this securitization as a sale or as a borrowing transaction? Explain. b. Record the entries in Randolph's books relating to Randolph's securitization of mortgage receivables. Requirement a. Should Randolph record this securitization as a sale or as a borrowing transaction? Explain. The securitization transaction should be recorded --- -(as a borrowed transaction/ as a sale) because the risks and rewards of ownership ------have/have not) been transferred from Randolph to the investors in the mortgage-backed securities Requirement b. Record the entries in Randolph's books relating to Randolph's securitization of mortgage receivables. (Enter amounts in millions. Record debits first, then credits. Explanations are not required.) Date Accounts Debit Credit

Answer 1

Requirement a.

The securitization  transaction should be recorded as a sale because the risks and rewards of ownership have been transferred from Randolph to the investors in the mortgage - backed securities.

Requirement b. Randolph Books

( in millions )

Date	Accounts	Debit	Credit
	Cash received	$29.5
	Loss on sale of mortgage receivables	$0.5
	Accounts/ Mortgage receivable		$30