Sparwood Credit Union is a small, regional financial institution with a loyal customer base. Like most financial institutions, Sparwood 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 $20 million of mortgages receivable for proceeds of $19.5 million. Under the securitization arrangement, investors in the mortgage-backed securities bear the cost of any defaults on the mortgages. Sparwood’s only continuing involvement in the mortgages is the administration of the cash receipts and the transfer of that cash to the investors.
Required:
a. Should Sparwood record this securitization as a sale or as a borrowing transaction? Explain.
b. Record the entry in Sparwood’s books relating to Sparwood’s securitization of mortgage receivables.