The SEC has told Fieldstone Investment Corp. that its interest rate swaps don't qualify for FAS 133, leading to a restatement of income. But the net effect of the restatement will be an increase in net income.
The parent company of Fieldstone Mortgage Co. announced it will eliminate the use of cash flow hedge accounting treatment for interest rate swap transactions in place during the year ended Dec. 31, 2003, and the first three quarters of 2004.
Fieldstone said the interest rate swaps were designed to allow it to stabilize its interest expense on the debt financing of its mortgage loans held for investment while the mortgage loans have a fixed interest rate, which is generally during the first two years of the mortgage's lives. The firm intended its swap transactions to create an effective economic hedge of its debt expense, and attempted to document the swap transactions to meet the requirements of Financial Accounting Standard No. 133.
The decision to restate is subsequent to an assessment by the Securities and Exchange Commission. The regulator indicated to Fieldstone that it was in its view that "Fieldstone's contemporaneous hedge documentation was not sufficient to qualify the interest rate swaps for cash flow hedge accounting under FAS 133," according to the announcement.
Fieldstone said it expects the elimination of cash flow hedge accounting on the swap transactions will result in a net income decrease of approximately $2.2 million in 2003 and an increase of about $5.3 million for the nine months ended Sept. 30, 2004.
Total shareholders' equity is expected to escalate by approximately $250,000 as of that third quarter's end, while remaining unchanged for 2003, the announcement said.
While the restatement appears to positively affect Fieldstone, any ownership transactions that occurred during the period of underreporting could lead to a lawsuit.
The restatements will not affect Real Estate Investment Trust's, or REITs, Taxable Income, which is the basis for determining the dividends paid to shareholders, the announcement said.
Periods prior to the fourth quarter of 2003 are not impacted because Fieldstone reportedly did not engage in interest rate swap transactions prior to December 2003.
Fieldstone said it is assessing alternative hedge strategies that will meet requirements of FAS 133 in order to apply cash flow hedge accounting for interest rate swaps it enters in the future. Until then it will not use such accounting on its interest rate swap transactions.
Fieldstone Mortgage reportedly originates loans through its network of over 4,600 independent mortgage brokers and its branch office locations in 27 states.