Private lenders can scale with securitizations when consolidation, control and valuation are handled correctly.

If you are looking to capitalize on loan securitizations, you are not alone. Securitizations are increasingly popular because they allow private lenders to grow efficiently, increase liquidity, and tap broader capital markets.

The mechanism is straightforward in concept. You pool loans and sell them through special-purpose entities (SPEs) to mitigate risk or achieve liquidity. Despite the advantages, the accounting rules concerning securitizations are far from straightforward, and getting them wrong can have consequences on the perception of your business performance.

This article explains key accounting issues that arise when private-label mortgage securitizations move from planning to execution and then to financial reporting. The goal is to help you avoid surprises and present results that hold up in audits and with investors.

Who Is a Candidate for Securitization? 

Many private lenders think securitization is reserved for larger institutions. Scale and operational maturity are important, but the threshold is often lower than you might expect. A lender with a growing and repeatable origination model becomes a candidate when traditional funding sources begin to constrain volume.

Reaching warehouse limits consistently is a clear sign that a longer-term funding solution may be appropriate. Demonstrated repeatability in loan originations and stable portfolio performance also indicate readiness. As a practical matter, lenders may start to consider securitization once they consistently originate and aggregate pools of 75 to 100 loans totaling around $75 million to $100 million or more. Larger and more diversified pools are generally more attractive to investors and rating agencies.

Publicly visible deals tend to be bigger, often $150 million to $200 million or more, because structuring and issuance costs are meaningful. However, smaller lenders can still achieve securitizations if structured properly.

The all-in cost to bring a securitization deal from start to finish can be significant, ranging from $250,000 to more than $1,000,000 depending on the complexity of the transaction and the size of the deal. Expect legal, underwriting, trustee, rating agency, and accounting fees to dominate the budget. The economics of the transaction should address these costs explicitly in advance so there are no surprises.

What is a Securitization?

In simple terms, securitization is the process of transferring a defined pool of loans into an SPE that issues securities to investors. The securities are backed by the cash flow generated from the underlying loans. Depending on the structure of the transaction, you might retain a portion of the securities, act as the servicer, or hold certain residual or control rights.

From an accounting perspective, the key question is: Did you truly sell the loans or are you still on the hook for them?

Why Lenders Choose to Securitize

Securitization is a powerful tool that can release capital and help lenders recycle funds. Selling pools of loans generates fresh capital and enable you to originate more loans and pay down short-term funding facilities. When structured as a true sale, credit risk migrates away from the transferor, which can diversify and mitigate loss exposure. Access to capital markets can also broaden the investor base and, in some cases, offer more competitive rates than traditional funding avenues.

Start With the VIE Assessment

Before diving into whether the securitization meets sales criteria under ASC 860, confirm whether the SPE is a variable interest entity (VIE) and whether you are its primary beneficiary. If you’re required to consolidate the SPE as a VIE, then the sale accounting becomes a moot point because the assets and liabilities of the entity stay on your balance sheet.

Generally, all securitization SPEs qualify as VIEs because the equity at risk isn’t substantial or because equity holders lack meaningful decision-making power. If the equity investors cannot effectively control the entity or do not have sufficient skin in the game, then it is likely a VIE. You are generally regarded as the primary beneficiary if you have both the power to direct the activities of the SPE that most significantly impact the SPE’s economic performance and you have exposure to benefits or losses that could be significant.

The bottom line is simple. Even if you think the loans have been sold, consolidation rules may require you to retain them on your books. It’s a matter of who controls and benefits from the entity. Only after concluding that the SPE does not require consolidation should you proceed to the sale accounting assessment.

The Sale Accounting Test Under ASC 860

A transfer qualifies as a true sale under U.S. GAAP only if all three conditions in ASC 860 are met. First, the transferred assets must be legally isolated from the company, even in the event of bankruptcy. Second, the buyer (or SPE investors) must be free to pledge or sell its interests in the transferred assets. If their hands are tied, it’s not a true sale. Third, you must not retain effective control over the transferred assets. This is where things get tricky, and any ongoing influence can break the sale.

If the structure allows you to remove assets after the sale, or to reclaim the loans after certain conditions are met, you may fail the control test, even if the SPE is bankruptcy-remote. If you can effectively get them back, did you actually sell them?

If you are unable to satisfy these conditions, the loans will remain on your balance sheet, and the proceeds received will be accounted for as secured borrowing, rather than as revenue. In other words, no gain is recognized on the “sale.”

Valuing Retained Interest

Assuming your structure qualifies for sale accounting and you retain an interest in the securitization, the interest becomes a new asset on your books and must be initially measured at fair value. Retained interest may include residual equity, interest-only strips (the right to future interest-only payments), excess spread (the remaining interest income after paying investors and expenses) and subordinated tranches (the most junior, first-loss pieces).

Typically, you will need to value this asset using a discounted cash flow (DCF) model. The critical inputs for these models include expected loan performance, including prepayment speeds, default rates, and loss severity, as well as discount rates and relevant market assumptions.

It is important to note that even small changes to your default rate and prepayment speed assumptions can significantly impact fair value. Make sure your assumptions are supportable and well-documented because they will be a focus of audit scrutiny.

At initial recognition, you must choose between the fair value option, which sends changes in value directly through income, and although this gives a clearer picture of the value of your retained interest, it brings volatility to your income statement. amortized cost with impairment, which can reduce income statement volatility. This election must be made at initial recognition and disclosed in your financials. Once FVO is elected, you are unable to revert to amortized cost.

If you consolidate the SPE under the VIE rules, the entire securitization structure, as well as the retained interest, gets incorporated into the financial statements. Likewise, if the transaction fails sale accounting under ASC 860, the loans are not derecognized from your balance sheet. In both situations, the original accounting election for those loans (FVO or amortized cost) will continue. There is no opportunity to reset the accounting just because the loans were placed into an SPE.

When Securitizations Get Tricky

Securitizations often run into accounting issues not because of the high-level concepts, but because of the specific, granular details of the deals. The most common problems arise from how you structure your servicing arrangements and what interest you retain. These are the factors that can cause you to fail the critical tests for consolidation and sale accounting.

Control and Retained Interest Valuation Considerations. Valuing nontraded retained interests is highly model-dependent. If internal models are too optimistic on prepayment or default assumptions, the initial fair value can be overstated and future write-downs can create a significant adjustment to income. If the retained interest is large enough to give you a significant portion of the SPE’s profits and losses, the structure will likely draw scrutiny under the economic interest component of the VIE test.

Servicing Arrangements: The “Control” Conundrum. As the servicer, you naturally have power to control the loans. If you are the only party with meaningful control, or if control is concentrated with you, that meets the “power” element of the primary beneficiary test.

Sale accounting introduces a separate control question. Even if the VIE rules do not lead to consolidation, the servicing contract may still prevent sale accounting. That occurs when the servicer or originator retains rights that allow ongoing influence over the transferred assets.

If you can unilaterally modify loan terms in a way that significantly impacts the economics for investors, it suggests that control is retained. Further, if you can, at your sole discretion, repurchase loans beyond standard representations and warranties, sale accounting is not met.

These are the areas where the structuring and documentation must be meticulously crafted to achieve the desired accounting treatment.

Common Reasons Sale Accounting Fails GAAP Treatment

Most Common Reasons Sale Accounting Fails (ASC 860). A transfer fails when you retain effective control through repurchase rights or substitution rights beyond standard representations and warranties. A failure of legal isolation—because the transfer is not perfected or the SPE is not truly bankruptcy-remote—also defeats sale treatment. If investors can’t freely pledge or exchange their interests, the test is not met. Finally, the absence of a true sale opinion from legal counsel often indicates underlying structural weakness that will not pass an audit review.

Most Common Reasons the SPE Must be Consolidated (ASC 810). Consolidation is typically required when the sponsor controls critical functions such as loan servicing, modification or default decisions, whether performed directly or through a sub-servicer under the sponsor’s direction. Consolidation also arises when the sponsor retains first-loss risk through the most subordinate (first loss) position, when the SPE is undercapitalized and its equity holders are passive, or when power and economics together lead to consolidation.

How It All Comes Together

Let’s go through a few examples to show how structure drives accounting details.

Scenario 1: A Successful Sale (and No Consolidation). Imagine that you securitize $20 million in DSCR loans into a new SPE. You retain a portion of the residual tranche along with the servicing rights, but an independent third-party trustee manages all significant credit decisions. Investors purchase senior securities worth $18 million. The SPE qualifies as a VIE because it lacks sufficient equity.

You do not consolidate the SPE under ASC 810 because you fail the power test. The trustee makes the key credit decisions. You also don’t absorb a majority of the entity’s risks or rewards relative to other parties with a significant economic interest.

The securitization meets the ASC 860 sale accounting criteria: The transferred loans are legally isolated, you do not retain effective control, and investors can freely pledge or exchange their securities. You retain a $2 million residual interest measured at fair value using a DCF model, and you elect the FVO for this retained interest.

Who consolidates the VIE in this case? The SPE is a VIE, but you are not its primary beneficiary. Another party that meets both the power and economics criteria would consolidate. On your books, you would derecognize $20 million of loans, recognize $18 million in cash, record a $2 million retained interest, and recognize any gain or loss on the sale.

Scenario 2: A Failed Sale (and Consolidation). Now assume that you securitize $15 million in fix-and-flip loans through an SPE. You retain all servicing rights and hold a $2 million subordinate tranche that absorbs the first 20% of losses.

The SPE qualifies as a VIE. You control loan modifications and default decisions as the servicer, which satisfies the power element, and you retain a substantial subordinated position, which provides significant economic interest. You are, therefore, the primary beneficiary of the VIE under ASC 810, and sale accounting becomes irrelevant because VIE consolidation rules are in effect.

Your financials would show $15 million in loans still on the balance sheet, $13 million in cash received from investors, $13 million in matching liability (a secured borrowing), and no recognized gain.

Before You Close

Ask your accountants and legal advisers whether the SPE is a VIE and whether you are primary beneficiary. Confirm that your securitization structure meets all the criteria for sale accounting under ASC 860. Validate that your retained interest uses sound and supportable assumptions and that documentation can withstand audit review. Document the appropriate fair value option and amortized cost. Ensure financial statements accurately reflect the true risk-and-return profile to investors.

Build Investor Confidence

Private lenders can grow and optimize their capital through securitization, but the related intricacies can be daunting. With detailed knowledge of VIEs, sale accounting, and fair value measurement, you will be in a much stronger position to present your business with clarity and withstand audit scrutiny.

Compliance is important, and so is transparency. Give partners and investors the information they need as your business scales by aligning structure, policies, and systems so reported results reflect the risks and returns you chose.

As you execute your strategy, make sure your accounting policies and systems can produce the data needed to tell the right story about your business.