One of the loans included in Sloppy Mortgage Corporations loans at January 1, 2006, was a pay-option
Question:
One of the loans included in Sloppy Mortgage Corporation’s loans at January 1, 2006, was a pay-option ARM loan of \($900,000\) taken out on January 1, 2006, when the value of the house was \($900,000\).
The interest earned (or accrued) on this loan for the year was \($54,000.\) The principal repayments during the year amounted to \($30,000\) (\($2,500\) per month). The borrower opted to pay principal plus only \($1,500\) interest per month. The borrower remained current on these repayments for all 12 months of 2006.
On January 1, 2007, the repayment reset to \($7,500\) per month, and the borrower immediately informed the lender that no future payments would be made on the loan.
The house immediately went into foreclosure, and the house quickly sold for \($700,000\).
What is the amount of the loss that Sloppy Mortgage must recognize in its income statement in 2007 if it has no allowance for loan losses in respect of this loan?
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