Refer to Theory in Practice vignette 1.2, concerning the bankruptcy of New Century Financial. New Century had securitized and transferred to investors (i. e., derecognized) many (but not all) of its subprime mortgages, treating the transfers as sales. However, as the 2007– 2008 market meltdowns developed, it was forced to repurchase many of these mortgages. Its provisions for credit losses on repurchases proved to be woefully inadequate. The company quickly ran out of cash.
a. Why would a company such as New Century retain an interest in some of the mort-gages it originated, rather than selling all of them on to investors via securitization?
b. Why would the company commit to repurchasing delinquent mortgages?
c. Suppose that the derecognition provisions of IFRS 9 and the disclosure provisions of IFRS 7 and 12, outlined in Section 7.8 were in effect from 1995, the date New Century was formed. Could New Century’s filing for bankruptcy protection have been avoided? Explain.