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Accounting Expert Simplifies Key Element in Sub-prime Mortgage Crisis

“We are seeing only the tip of the iceberg and the worse is yet to come,” says John D. Rossi, III, CPA

Bethlehem, Pa., August 29, 2007— What a difference a year has made in the state of sub-prime mortgages and the financial mess the economy faces as a result. John D. Rossi, III, associate professor of accounting at Moravian College can explain the complex situation including special accounting standards in relative non-technical terms and point out a key element missing in the media coverage of the crisis.

“It all starts with our government,” says Rossi. “To stimulate the economy, the federal government makes cheap money available, and because of an inexpensive plentiful supply, lenders, including the mortgage industry, wrote loans that never should have been written.”

“I am talking about all of those creative products in which principal and interest are back end loaded, such as teaser rates and no money down,” Rossi explains. “Most mortgage companies are only brokers; they are in the business of writing loans not holding and in many cases they don’t servicing them.  From the mortgage broker’s prospective you can make a lot of  money creating or writing mortgages and because of special accounting rules known as QSPE’s they can hide, although only temporarily, from the responsibility and accountability.  These QSPE’s represent a special carved out exception to the normal accounting rules and were added to the accounting literature as a result of a good lobbying job on the part of the lending industry.”

Rossi believes the media have left out an important key element in their reporting on the cause of the crisis. “The special accounting rules have been rarely mentioned in the media, partially because they are extremely complex and involve phrases that only a  seasoned accountant can explain,” he noted. “By ignoring then, the public is missing a significant piece of the puzzle in understanding what exactly is going on.”

Rossi draws an analogy between the sub-prime mortgages mess and the savings and loan crisis.  “Flaws in the accounting rules played a substantial blame for the mess and in the end required government bailout.  I believe that we are seeing only the tip of the iceberg and the worse is yet to come.  Unfortunately, accounting rules hide the problem, so it would be very difficult to determine exactly the size of this iceberg.”

John D. Rossi, III, associate professor of accounting, and is an expert in Generally Accepted Accounting Principles. He holds the following professional certifications: CPA (Certified Public Accountant); PFS (Personal Financial Specialist); CMA (Certified Management Accountant); CFM (Certified in Financial Management);  and CFP®; (Certified Financial Planner). In addition; Mr. Rossi is a frequent seminar presenter on technical financial accounting issues at professional workshops and continuing education programs and often publishes articles in professional journals.

Moravian College is a private, coeducational, selective liberal arts college located in Bethlehem, Pennsylvania. Tracing its founding to 1742, it is recognized as America's sixth-oldest college. Visit the Web site at www.moravian.edu.