CORRESP 1 filename1.htm snfccorr110508.htm
SECURITY NATIONAL FINANCIAL CORPORATION
5300 South 360 West, Suite 250
Salt Lake City, Utah 84123
Telephone (801) 264-1060


November 6, 2008

VIA EDGAR

Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549

Attn:     Sharon M. Blume
Reviewing Accountant

Re:       Security National Financial Corporation
Form 10-K for Fiscal Year Ended December 31, 2007
Form 10-Q for Fiscal Quarter Ended June 30, 2008
File No. 0-9341

Dear Ms. Blume:

Security National Financial Corporation (the “Company”) is in receipt of the letter dated October 16, 2008 with respect to the above-referenced Form 10-K for the fiscal year ended December 31, 2007 and Form 10-Q for the fiscal quarter ended June 30, 2008. Although responses to the comments in the letter are required to be made within ten business days from the date of the letter, Chris Harley, Staff Accountant, acquiesced to extending the time for the Company to file responses thereto until November 6, 2008. The Company’s responses to the comments are set forth below.  For ease of reference, the Company has set forth the comments and its responses as follows:

Form 10-K for Fiscal Year Ended December 31, 2007

Consolidated Financial Statements
Consolidated Balance Sheets, page 43

 
1.
We have reviewed your response to prior comment two from our letter dated September 25, 2008.  Please tell us whether you make the determination to sell mortgage loans at origination (and classify them as held-for-sale) or at a later date.  If at a later date, tell us how you classify the loans at origination and your basis for that classification.  Refer to paragraph 8a of SOP 01-6.

Response:

The determination to sell long-term residential mortgage loans is made by the Company at the date a purchase commitment is received from a third-party investor, which is prior to the date of origination, because the Company only originates long-term residential mortgage loans after it receives purchase commitments from investors. Thus, the determination to sell such loans is actually made prior to origination and not at a later date. The requirement of paragraph 8a of SOP 01-6 to carry mortgage loans held for investment at their adjusted principal balance is not applicable to the long-term residential mortgage loans originated by the Company as such loans are only originated to be sold. Upon originating the loans, the loans are in effect momentarily classified as held-for-sale and are immediately sold to the warehouse bank, which then sells the loans to investors. Accordingly, the fair value of the residential mortgage loans is originally recorded by the Company as “Mortgage Loans Sold to Investors.”

 
 
 

November 6, 2008
Page 2 of 13
___________________________

Commercial mortgage loans and residential construction loans are originated with the intent to hold them as investments. The investment period of these loans is generally for a period of less than one year. The determination to hold these loans as investments is made at the time of origination and the loans are classified at that time as “Mortgage Loans on Real Estate and Construction Loans, Net of Allowances for Losses.” The loans are carried at their adjusted principal balance in accordance with paragraph 8a of SOP 01-6.


Notes to Consolidated Financial Statements

Note 1- Significant Accounting Policies
Mortgage Operations, page 53

 
2.
We have reviewed your response to prior comment seven from our letter dated September 25, 2008.  You state that for mortgages originated and held for investment, mortgage fee income and related expenses are recognized when the loan is originated.  Please tell us how your policy complies with the applicable guidance in paragraphs 5-7 of SFAS 91.

Response:

Our earlier response was incomplete as it suggested that all mortgage loans are originated with the intent to hold them as investments. However, for purposes of clarity, it should be noted that only commercial mortgage loans and residential construction loans are originated with the intent to hold such loans as investments, as further described in our response to comment 1 above. Long-term residential mortgage loans are only originated to be sold to investors under purchase commitments. Management intends to include the following disclosures in future filings:

For long-term residential mortgages originated and sold to third-party investors, mortgage fee income and related expenses are recognized when such loans are sold.

Commercial mortgage loans and residential construction loans that are originated and held for investment are carried at their principal balances adjusted for chargeoffs, the related allowance for loan losses, and net deferred fees or costs on originated loans. The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans. As of December 31, 2007, the net deferred origination fees were $156,000. The Company determined that these net fees were not material enough to defer.

Accordingly, the Company believes it complies with the applicable guidance of paragraphs 5-7 of SFAS 91.

Note 3—Investments, page 64

 
3.
We have reviewed your response to prior comment eight from our letter dated September 25, 2008.  Please revise your proposed disclosures to provide additional information concerning the primary categories of fixed maturity and equity securities in unrealized loss positions at December 31, 2006 and 2007.  For example:
 
 
 
 

November 6, 2008
Page 3 of 13
___________________________
 
 
·
Discuss in detail, the information you considered in reaching the conclusion that the impairments within the “corporate securities and other public utilities” and “mortgage backed securities” categories within fixed investment securities are not other than temporary.

Response:

On a quarterly basis, the Company reviews its fixed investment securities related to corporate securities and other public utilities, consisting of bonds and preferred stocks that are in a loss position. The review involves an analysis of the securities in relation to historical values, price earnings ratios and projected earnings and revenue growth rates. Based on the analysis, a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized.

Mortgage backed securities are included in investments in fixed maturity securities, typically held to maturity, and carried at amortized cost in the balance sheet. Because the investments are to be held to maturity, the investments are only written down to their fair value if the investments have a rating of as low as six by the National Association of Insurance Commissioners (NAIC), which rating is equivalent to a C or lower rating by Moody's or Standard & Poor's.

 
·
Discuss in detail, the information you considered in reaching the conclusion that the impairments within the “industrial, miscellaneous and all other” category within equity securities are not other than temporary.

Response:

On a quarterly basis, the Company reviews its investment in industrial, miscellaneous and all other equity securities that are in a loss position.  The review involves an analysis of the securities in relation to historical values, price earnings ratios, projected earnings and revenue growth rates. Based on the analysis, a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized.

 
·
Disclose the number of investment positions that are in an unrealized loss position;
 
·
Disclose the severity and duration of the impairment(s); and
 
·
Disclose any other information you considered relevant in reaching your conclusion that the above investments were not other than temporarily impaired.
 
·
Provide us with your proposed disclosures.  Refer to paragraph 17b of FSP115-1/124-1.

The following are the proposed disclosures related to paragraph 17b and other requirements of FSP115-1/124-1:

 
 
 
 
November 6, 2008
Page 4 of 13
___________________________

Fixed Maturity Securities

The following tables summarize unrealized losses on fixed-maturities securities, which are carried at amortized cost, at December 31, 2007 and 2006. The unrealized losses were primarily related to interest rate fluctuations or spread-widening, and mortgage and other asset-backed securities. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related fixed-maturity securities:

   
Unrealized
          
Unrealized
              
   
Losses for
          
Losses for
              
   
Less than
    
No. of
    
More than
    
No. of
    
Total
  
   
Twelve
    
Investment
    
Twelve
    
Investment
    
Unrealized
  
   
Months
    
Positions
    
Months
    
Positions
    
Loss
  
At December 31, 2007
                              
Interest rate or spread widening
   $ 1,682,779       66     $ 1,169,203       71     $ 2,851,982  
Mortgage and other asset-backed securities
     176,709       5       293,678       9       470,387  
Total unrealized losses
   $ 1,859,488       71     $ 1,462,881       80     $ 3,322,369  
Fair Value
   $ 28,688,080             $ 27,653,726             $ 56,341,806  
                                         
At December 31, 2006
                                        
Interest rate or spread widening
   $ 365,512       82     $ 466,096       37     $ 831,608  
Mortgage and other asset-backed securities
     20,563       2       310,921       10       331,484  
Total unrealized losses
   $ 386,075       84     $ 777,017       47     $ 1,163,092  
Fair Value
   $ 28,690,897             $ 23,549,487             $ 52,240,384  

As of December 31, 2007, the average market value of the related fixed maturities was 94.4% of amortized cost compared to 97.8% of amortized cost as of December 31, 2006.  No other-than-temporary impairment loss was considered necessary for these fixed maturities as of December 31, 2007.

Equity Securities

The following tables summarize unrealized losses on equity securities, which were carried at estimated fair value based on quoted trading prices at December 31, 2007 and 2006.  The unrealized losses were primarily the result of decreases in market value due to overall equity market declines. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related equity securities available for sale:


 
 
 

November 6, 2008
Page 5 of 13
___________________________

   
Unrealized
          
Unrealized
              
   
Losses for
          
Losses for
              
   
Less than
    
No. of
    
More than
    
No. of
    
Total
  
   
Twelve
    
Investment
    
Twelve
    
Investment
    
Unrealized
  
   
Months
    
Positions
    
Months
    
Positions
    
Losses
  
At December 31, 2007
                              
Non-redeemable preferred stock
   $ -           $ 3,632       2     $ 3,632  
Public utilities
     2,870       1       10,757       1       13,627  
Banks, trusts and insurance companies
     21,662       1       -               21,662  
Industrial, miscellaneous and all other
     80,333       6       407,264       5       487,597  
Total unrealized losses
   $ 104,865       8     $ 421,653       8     $ 526,518  
Fair Value
   $ 494,728             $ 85,453             $ 580,181  
                                         
At December 31, 2006
                                        
Non-redeemable preferred stock
   $ -             $ 2,718       2     $ 2,718  
Public utilities
     -               10,557       1       10,557  
Banks, trusts and insurance companies
     -               21,265       1       21,265  
Industrial, miscellaneous and all other
     304       1       434,786       8       435,090  
Total unrealized losses
   $ 304       1     $ 469,326       12     $ 469,630  
Fair Value
   $ 22,238             $ 123,739             $ 145,977  

As of December 31, 2007, the average market value of the related equity securities available for sale was 52.4% of the original investment compared to 23.7% of the original investment as of December 31, 2006.   The intent of the Company was to retain equity securities for a period of time sufficient to allow for the recovery in fair value.  However, the Company may sell equity securities during a period in which the fair value has declined below the amount of the original investment. In certain situations new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security.  No other-than-temporary impairment loss on equity securities was determined to exist as of December 31, 2007.


Form 10-Q for Fiscal Quarter Ended June 30, 2008

Management’s Discussion and Analysis
Mortgage Operations, page 17

 
4.
We have reviewed your response to prior comment nine from our letter dated September 25, 2008.  Please provide us with the following additional information to help us better understand the loan sale, repurchase and transfer transactions:

 
·
Tell us the date the loans were originally sold and provide us with a thorough analysis of how the sales met the criteria for sale accounting in paragraph 9 of SFAS 140;
 
·
Tell us the date of the repurchase;
 
·
Tell us the date of the transfer from the held for sale to held for investment category;
 
·
Tell us when you determined the third party investors were not able to settle the loans sold to them;
 
·
Tell us whether you received, or whether the third party investor received, income on the loans during the time period between the sale and repurchase;

 
 
 

November 6, 2008
Page 6 of 13
___________________________
 
 
·
Tell us how you determined the fair value of the loans when they were sold, repurchased and transferred; and
 
·
Provide us with the journal entries you recorded for the sale, repurchase and transfer.

Response:

As stated in our response to Comment 7 in the September 25, 2008 comment letter, for mortgage loans sold to third-party investors, mortgage fee income and related expenses are recognized at the time the mortgage loans meet the sales criteria for financial assets, which criteria are as follows:  (1) the transferred assets have been isolated from the Company and its creditors, (2) the transferee has the right to pledge or exchange the mortgage loans, and (3) the Company does not maintain effective control over the transferred mortgage loans. All rights and title to the mortgage loans are assigned to unrelated third-party investors, such as Countrywide Bank or Well Fargo Home Mortgage, including any investor commitments for these loans prior to their purchasing these loans under the purchase commitments. These loans are sold without recourse to the Company. Under related agreements, repurchase may be required in the event of fraud in the loan application process by others or due to errors in the underwriting process.  Based on this analysis, the Company believes that the sales of the mortgage loans met the criteria for sale accounting in paragraph 9 of SFAS 140.

The following table identifies the long-term residential mortgage loans, the dates the loans were originally sold, the dates the loans were repurchased, which is within a few days of the date the Company was notified that the investor was not going to settle the loan, and the dates the loans should have been transferred from “Mortgage Loans Sold to Investors” to “Mortgage Loans on Real Estate” (held-for-investment):
               
Date
  
               
Transferred
  
   
Date
  
Loan
      
to Mortgage
  
   
Originally
  
Principal
  
Date
  
Loans Held
  
Loan No.
  
Sold
  
Amount
  
Repurchased
  
for Investment
Comment
  0000359018  
1/3/2007
     $     80,618  
5/25/2007
  
5/25/2007
  
  0000353101  
1/8/2007
     336,179  
4/5/2007
  
4/5/2007
  
  0000359820  
1/8/2007
     97,266  
7/5/2007
  
7/5/2007
  
  0000358565  
1/10/2007
     98,024  
4/6/2007
  
4/6/2007
  
  0000361386  
1/24/2007
     272,520  
4/19/2007
  
4/19/2007
  
  0000361909  
1/26/2007
     118,526  
4/18/2007
  
4/18/2007
  
  0000362032  
1/26/2007
     221,139  
5/25/2007
  
5/25/2007
  
  0000360538  
2/1/2007
     151,384  
7/5/2007
  
7/5/2007
  
  0000364462  
2/14/2007
     176,512  
4/19/2007
  
4/19/2007
  
  0000364111  
2/16/2007
     140,230  
4/19/2007
  
4/19/2007
  
  0000365108  
2/22/2007
     228,779  
7/5/2007
  
7/5/2007
  
  0000363101  
2/28/2007
     343,754  
5/16/2007
  
5/16/2007
  
  0000363543  
3/1/2007
     229,188  
5/16/2007
  
5/16/2007
  
  0000363163  
3/2/2007
     283,182  
5/25/2007
  
5/25/2007
  
  0000367001  
3/6/2007
     413,528  
7/5/2007
  
7/5/2007
  
  0000366253  
3/13/2007
     165,249  
7/18/2007
  
7/18/2007
  
  0000367878  
3/19/2007
     94,479  
7/23/2007
  
7/23/2007
  
  0000368126  
3/22/2007
     76,734  
6/8/2007
  
6/8/2007
  

 
 
 

November 6, 2008
Page 7 of 13
___________________________

               
Date
  
               
Transferred
  
   
Date
  
Loan
      
to Mortgage
  
   
Originally
  
Principal
  
Date
  
Loans Held
  
Loan No.
  
Sold
  
Amount
  
Repurchased
  
for Investment
Comment
  0000368489  
3/22/2007
        $     93,720  
7/5/2007
  
7/5/2007
  
  0000369548  
3/22/2007
     223,105  
7/18/2007
  
7/18/2007
  
  0000369672  
4/2/2007
     407,882  
7/18/2007
  
7/18/2007
  
  0000371402  
4/5/2007
     139,194  
4/5/2007
  
4/5/2007
  
  0000371240  
4/5/2007
     212,093  
4/5/2007
  
4/5/2007
  
  0000370997  
4/17/2007
     114,759  
7/25/2007
  
7/25/2007
  
  0000372876  
4/20/2007
     260,916  
8/3/2007
  
8/3/2007
  
  0000371498  
4/26/2007
     426,805  
7/25/2007
  
7/25/2007
  
  0000373859  
5/3/2007
     262,122  
7/25/2007
  
7/25/2007
  
  0000373738  
5/3/2007
     260,564  
7/25/2007
  
7/25/2007
  
  0000373805  
5/3/2007
     324,505  
8/3/2007
  
8/3/2007
  
  0000372868  
5/4/2007
     161,550  
8/15/2007
  
8/15/2007
  
  0000377442  
5/10/2007
     292,355  
5/10/2007
  
5/10/2007
  
  0000376305  
5/21/2007
     245,272  
8/15/2007
  
8/15/2007
  
  0000378002  
5/22/2007
     298,889  
7/23/2007
  
7/23/2007
  
  0000374865  
5/23/2007
     528,019  
5/23/2007
  
5/23/2007
  
  0000373779  
5/25/2007
     404,022  
7/23/2007
  
7/23/2007
  
  0000379701  
5/30/2007
     395,096  
8/17/2007
  
8/17/2007
  
  0000376921  
5/31/2007
     359,532  
5/29/2007
  
5/29/2007
  
  0000379859  
5/31/2007
     96,415  
7/23/2007
  
7/23/2007
  
  0000377932  
6/1/2007
     174,760  
8/16/2007
  
8/16/2007
  
  0000378701  
6/5/2007
     874,890  
7/24/2007
  
7/24/2007
  
  0000377762  
6/6/2007
     320,170  
8/15/2007
  
8/15/2007
  
  0000378301  
6/6/2007
     545,500  
8/17/2007
  
8/17/2007
  
  0000379200  
6/6/2007
     175,922  
8/17/2007
  
8/17/2007
  
  0000378219  
6/8/2007
     700,898  
6/8/2007
  
6/8/2007
  
  0000380975  
6/11/2007
     232,393  
7/23/2007
  
7/23/2007
  
  0000378523  
6/15/2007
     234,502  
8/16/2007
  
8/16/2007
  
  0000378492  
6/19/2007
     434,552  
8/15/2007
  
8/15/2007
  
  0000380891  
6/28/2007
     210,581  
8/24/2007
  
8/24/2007
  
  0000383783  
6/28/2007
     276,201  
9/5/2007
  
9/5/2007
  
  0000383111  
6/29/2007
     450,297  
10/15/2007
  
10/15/2007
  
  0000384760  
7/5/2007
     59,556  
9/7/2007
  
9/7/2007
Second mortgage
  0000384048  
7/6/2007
     67,345  
10/2/2007
  
10/2/2007
  
  0000383321  
7/6/2007
     87,273  
9/7/2007
  
9/7/2007
Second mortgage
  0000384014  
7/6/2007
     121,398  
9/7/2007
  
9/7/2007
Second mortgage
  0000384301  
7/12/2007
     89,339  
11/2/2007
  
11/2/2007
  

 
 
 

November 6, 2008
Page 8 of 13
___________________________

               
Date
  
               
Transferred
  
   
Date
  
Loan
      
to Mortgage
  
   
Originally
  
Principal
  
Date
  
Loans Held
  
Loan No.
  
Sold
  
Amount
  
Repurchased
  
for Investment
Comment
  0000386724  
7/13/2007
     $   367,577  
10/23/2007
  
10/23/2007
  
  0000384842  
7/18/2007
     91,326  
9/7/2007
  
9/7/2007
Second mortgage
  0000383794  
7/20/2007
     12,711  
9/7/2007
  
9/7/2007
Second mortgage
  0000384918  
7/20/2007
     69,096  
9/7/2007
  
9/7/2007
Second mortgage
  0000384902  
7/23/2007
     275,615  
8/8/2007
  
8/8/2007
  
  0000383208  
7/23/2007
     288,808  
10/2/2007
  
10/2/2007
  
  0000380779  
7/23/2007
     32,612  
11/2/2007
  
11/2/2007
  
  0000387455  
7/23/2007
     148,091  
9/7/2007
  
9/7/2007
Second mortgage
  0000386316  
7/27/2007
     76,040  
1/10/2008
  
1/10/2008
  
  0000387760  
7/27/2007
     52,415  
9/7/2007
  
9/7/2007
Second mortgage
  0000387513  
7/30/2007
     321,637  
11/8/2007
  
11/8/2007
  
  0000386848  
7/30/2007
     23,552  
9/7/2007
  
9/7/2007
Second mortgage
  0000388152  
7/30/2007
     45,805  
9/7/2007
  
9/7/2007
Second mortgage
  0000388498  
7/31/2007
     377,907  
11/6/2007
  
11/6/2007
  
  0000383602  
7/31/2007
     518,174  
11/8/2007
  
11/8/2007
  
  0000386780  
7/31/2007
     110,480  
9/7/2007
  
9/7/2007
Second mortgage
  0000388472  
7/31/2007
     33,492  
9/7/2007
  
9/7/2007
Second mortgage
  0000386048  
7/31/2007
     133,116  
9/7/2007
  
9/7/2007
Second mortgage
  0000388621  
7/31/2007
     101,723  
9/7/2007
  
9/7/2007
Second mortgage
  0000388419  
7/31/2007
     172,853  
9/7/2007
  
9/7/2007
Second mortgage
  0000383603  
7/31/2007
     63,680  
9/7/2007
  
9/7/2007
Second mortgage
  0000386202  
8/2/2007
     291,258  
9/12/2007
  
9/12/2007
  
  0000386108  
8/2/2007
     183,349  
9/12/2007
  
9/12/2007
  
  0000387770  
8/2/2007
     142,583  
9/24/2007
  
9/24/2007
  
  0000387432  
8/2/2007
     149,738  
10/9/2007
  
10/9/2007
  
  0000387785  
8/2/2007
     59,554  
10/15/2007
  
10/15/2007
  
  0000385514  
8/3/2007
     107,018  
11/2/2007
  
11/2/2007
  
  0000386886  
8/3/2007
     190,418  
11/6/2007
  
11/6/2007
  
  0000388616  
8/3/2007
     146,115  
11/6/2007
  
11/6/2007
  
  0000383933  
8/3/2007
     141,977  
11/8/2007
  
11/8/2007
  
  0000389017  
8/3/2007
     24,313  
9/7/2007
  
9/7/2007
Second mortgage
  0000388687  
8/3/2007
     47,523  
9/7/2007
  
9/7/2007
Second mortgage
  0000385541  
8/3/2007
     82,294  
9/7/2007
  
9/7/2007
Second mortgage
  0000384348  
8/6/2007
     163,561  
11/6/2007
  
11/6/2007
  
  0000387151  
8/8/2007
     186,961  
11/6/2007
  
11/6/2007
  
  0000380328  
8/8/2007
     730,330  
11/8/2007
  
11/8/2007
  
  0000389674  
8/8/2007
     45,424  
9/7/2007
  
9/7/2007
Second mortgage


 
 
 

November 6, 2008
Page 9 of 13
___________________________

               
Date
  
               
Transferred
  
   
Date
  
Loan
      
to Mortgage
  
   
Originally
  
Principal
  
Date
  
Loans Held
  
Loan No.
  
Sold
  
Amount
  
Repurchased
  
for Investment
Comment
  0000383148  
8/8/2007
     $    124,616  
9/7/2007
  
9/7/2007
Second mortgage
  0000383141  
8/10/2007
     498,008  
11/6/2007
  
11/6/2007
  
  0000389295  
8/10/2007
     211,963  
11/6/2007
  
11/6/2007
  
  0000388263  
8/10/2007
     184,244  
11/6/2007
  
11/6/2007
  
  0000388413  
8/10/2007
     51,402  
9/7/2007
  
9/7/2007
Second mortgage
  0000389373  
8/10/2007
     50,438  
9/7/2007
  
9/7/2007
Second mortgage
  0000390584  
8/10/2007
     20,728  
9/7/2007
  
9/7/2007
Second mortgage
  0000387861  
8/13/2007
     64,435  
9/7/2007
  
9/7/2007
Second mortgage
  0000390568  
8/15/2007
     180,303  
11/6/2007
  
11/6/2007
  
  0000387977  
8/16/2007
     448,085  
11/6/2007
  
11/6/2007
  
  0000391441  
8/17/2007
     35,183  
9/7/2007
  
9/7/2007
Second mortgage
  0000389620  
8/20/2007
     48,660  
9/7/2007
  
9/7/2007
Second mortgage
  0000392712  
8/22/2007
     90,105  
9/7/2007
  
9/7/2007
Second mortgage
  0000391266  
8/23/2007
     285,985  
2/6/2008
  
2/6/2008
  
  0000389032  
8/23/2007
     388,488  
3/22/2008
  
3/22/2008
  
  0000389795  
8/23/2007
     116,754  
9/7/2007
  
9/7/2007
Second mortgage
  0000390829  
8/27/2007
     61,284  
9/7/2007
  
9/7/2007
Second mortgage
  0000389080  
8/27/2007
     58,159  
9/7/2007
  
9/7/2007
Second mortgage
  0000388125  
8/28/2007
     163,487  
10/18/2007
  
10/18/2007
  
  0000391848  
8/28/2007
     279,006  
1/10/2008
  
1/10/2008
  
  0000388411  
8/30/2007
     105,766  
11/6/2007
  
11/6/2007
  
  0000393413  
8/31/2007
     61,416  
10/23/2007
  
10/23/2007
  
  0000391526  
8/31/2007
     170,101  
11/6/2007
  
11/6/2007
  
  0000390635  
8/31/2007
     488,577  
11/6/2007
  
11/6/2007
  
  0000392717  
8/31/2007
     76,395  
11/6/2007
  
11/6/2007
  
  0000392283  
8/31/2007
     291,486  
11/6/2007
  
11/6/2007
  
  0000393295  
8/31/2007
     213,907  
2/6/2008
  
2/6/2008
  
  0000386777  
8/31/2007
     284,456  
3/22/2008
  
3/22/2008
  
  0000390339  
8/31/2007
     50,432  
9/7/2007
  
9/7/2007
Second mortgage
  0000391531  
8/31/2007
     20,993  
9/7/2007
  
9/7/2007
Second mortgage
  0000392734  
9/6/2007
     16,450  
9/7/2007
  
9/7/2007
Second mortgage
  0000393755  
9/14/2007
     307,655  
11/6/2007
  
11/6/2007
  
  0000397794  
9/28/2007
     490,469  
11/6/2007
  
11/6/2007
  
  0000394599  
10/3/2007
     34,484  
2/6/2008
  
2/6/2008
  
  0000398973  
10/12/2007
     193,848  
1/30/2008
  
1/30/2008
  
  0000397237  
10/18/2007
     229,819  
10/26/2007
  
10/26/2007
  
  0000397546  
10/18/2007
     290,205  
2/6/2008
  
2/6/2008
  

 
 
 

November 6, 2008
Page 10 of 13
___________________________

               
Date
  
               
Transferred
  
   
Date
  
Loan
      
to Mortgage
  
   
Originally
  
Principal
  
Date
  
Loans Held
  
Loan No.
  
Sold
  
Amount
  
Repurchased
  
for Investment
Comment
  0000397836  
10/29/2007
     $    249,140  
1/17/2008
  
1/17/2008
  
  0000401347  
11/1/2007
     285,493  
2/6/2008
  
2/6/2008
  
  0000400563  
11/2/2007
     178,995  
3/3/2008
  
3/3/2008
  
  0000399618  
11/2/2007
     380,195  
3/3/2008
  
3/3/2008
  
  0000401874  
11/2/2007
     333,152  
3/3/2008
  
3/3/2008
  
  0000401129  
11/7/2007
     185,702  
1/17/2008
  
1/17/2008
  
  0000398717  
11/7/2007
     144,115  
3/3/2008
  
3/3/2008
  
  0000402579  
11/8/2007
     76,192  
3/3/2008
  
3/3/2008
  
  0000401965  
11/15/2007
     115,918  
1/17/2008
  
1/17/2008
  
  0000401640  
11/19/2007
     211,187  
1/17/2008
  
1/17/2008
  
  0000403657  
11/19/2007
     126,225  
3/22/2008
  
3/22/2008
  
  0000403623  
11/19/2007
     93,729  
3/22/2008
  
3/22/2008
  
  0000402731  
11/19/2007
     312,154  
3/22/2008
  
3/22/2008
  
  0000392356  
11/28/2007
     64,205  
2/6/2008
  
2/6/2008
  
  0000403834  
12/3/2007
     177,994  
2/15/2008
  
2/15/2008
  
  0000405179  
12/3/2007
     63,509  
3/22/2008
  
3/22/2008
  
  0000404076  
12/3/2007
     272,738  
3/22/2008
  
3/22/2008
  
  0000405156  
12/3/2007
     300,564  
3/22/2008
  
3/22/2008
  
  0000403313  
12/3/2007
     231,169  
3/22/2008
  
3/22/2008
  
  0000404161  
12/3/2007
     414,833  
3/22/2008
  
3/22/2008
  
  0000403460  
12/3/2007
     269,530  
3/22/2008
  
3/22/2008
  
  0000406217  
12/3/2007
     367,155  
3/22/2008
  
3/22/2008
  
  0000398830  
12/3/2007
     265,824  
4/5/2008
  
4/5/2008
  
  0000399498  
12/5/2007
     133,408  
4/5/2008
  
4/5/2008
  
  0000402910  
12/7/2007
     84,303  
3/22/2008
  
3/22/2008
  
  0000404475  
12/7/2007
     104,584  
3/22/2008
  
3/22/2008
  
  0000405718  
12/10/2007
     403,441  
4/2/2008
  
4/2/2008
  
  0000401355  
12/13/2007
     198,604  
4/2/2008
  
4/2/2008
  
  0000403433  
12/21/2007
     60,372  
3/6/2008
  
3/6/2008
  
  0000404292  
12/21/2007
     561,902  
4/14/2008
  
4/14/2008
  
  0000406046  
12/31/2007
     355,669  
4/2/2008
  
4/2/2008
  
  0000407797  
12/31/2007
     419,647  
4/14/2008
  
4/14/2008
  
  0000408472  
12/31/2007
     271,094  
4/14/2008
  
4/14/2008
  
  0000407451  
1/3/2008
     101,156  
3/6/2008
  
3/6/2008
  
  0000405587  
1/3/2008
     88,655  
5/2/2008
  
5/2/2008
  
  0000409219  
1/10/2008
     256,620  
5/7/2008
  
5/7/2008
  
  0000410311  
1/17/2008
     101,733  
5/2/2008
  
5/2/2008
  

 
 
 

November 6, 2008
Page 11 of 13
___________________________

               
Date
  
               
Transferred
  
   
Date
  
Loan
      
to Mortgage
  
   
Originally
  
Principal
  
Date
  
Loans Held
  
Loan No.
  
Sold
  
Amount
  
Repurchased
  
for Investment
Comment
  0000405832  
1/17/2008
     $     286,063  
5/2/2008
  
5/2/2008
  
  0000409945  
1/17/2008
     153,398  
5/2/2008
  
5/2/2008
  
  0000411123  
1/17/2008
     359,280  
5/7/2008
  
5/7/2008
  
  0000410513  
1/17/2008
     295,687  
5/7/2008
  
5/7/2008
  
  0000408350  
1/25/2008
     148,812  
5/2/2008
  
5/2/2008
  
                       
            $36,290,743          


Generally, the Company received notices within six months from third-party investors that they were not going to settle loans the Company had sold to them. As the demand for mortgage loans declined in the secondary mortgage market, the Company began receiving notices from investors within a shorter time period. The Company determined that the third-party investors were not able to settle the loans sold to them on the dates that the Company was required to repurchase the unsettled loans. The Company repurchased the loans pursuant to the loan purchase agreements with the warehouse banks.

The second mortgage loans listed in the table above were funded by the Company and sold to third-party investors.  As a result, the dates on which the investors notified the Company that they would not be settling the second mortgage loans were not well documented in the Company’s records.  However, the dates have been estimated for purpose of preparing the above table based upon information available to management and the time period when the demand declined in the secondary mortgage market.

The financial statements reflect that the transfer of the mortgage loans from “Mortgage Loans Sold to Investors” to “Mortgage Loans on Real Estate” occurred during June 2008. The misclassification at December 31, 2007 of the loans repurchased in 2007 as “Mortgage Loans Sold to Investors” did not have any effect on the carrying amount of those loans since they were repurchased at par. Therefore, management does not believe that restatement of the December 31, 2007 financial statements for the reclassification of the loans repurchased to “Mortgage Loans on Real Estate” is necessary. The loan sale revenue recorded on the sale of the mortgage loans was reversed on the date the loans were repurchased and, as a result, the adjustment to revenue was recorded in the correct period.

As standard in the industry, the Company received payments on the mortgage loans during the time period between the sale date and the settlement or repurchase date. At the same time the Company paid interest to warehouse banks pursuant to the loan purchase agreements.

At the time the loans were sold to third-party investors, fair value was determined by the unexpired lock commitments to purchase the loans by investors. At the time of repurchase and transfer, the loans were determined to be held for investment and fair value of the loans was determined to be the unpaid principal balances adjusted for chargeoffs, the related allowance for loan losses, and net deferred fees or costs on originated loans.

 
 
 

November 6, 2008
Page 12 of 13
___________________________

The following example illustrates the typical flow of transactions relating to originating and selling mortgage loans. The example presents the basic funding transactions and omits various loan origination costs. A warehouse bank will typically fund an agreed-upon amount of the mortgage loans, which vary by warehouse bank. The warehouse bank is technically the initial purchaser of mortgage loans under the terms of a loan purchase agreement between the warehouse bank and the Company until such time as the loans are settled (and purchased) by the investor under a loan purchase commitment between the investor and the Company. The following illustrates a $100,000 hypothetical mortgage loan that is funded at 96%, or $96,000, by a warehouse bank. The remaining $4,000 to fund the loan and $2,000 to pay the broker commission expense, less $500 of loan origination revenue, or a net amount of $5,500, is funded by the Company. The mortgage fee income related to loan sales revenue is typically equal to the amount the Company pays to a broker for commission expense, or $2,000 in this example. The journal entry at the date the loan is closed is as follows:

 
Mortgage loans sold to investors
    $5,500
  
 
Commission expense
      2,000
  
 
Origination fee receivable
         500
  
   
Cash
  
    $5,500
   
Mortgage fee income – loan sales revenue
  
      2,000
   
Mortgage fee income – origination fee revenue
  
         500

Under the terms of the loan purchase commitment agreement, the third-party investor is committed to purchase the loan at a fixed price, which is 102%, or $102,000 in this example. However, the Company is able to earn additional revenue if it is able to meet certain criteria, such as delivering the loan documentation in a certain amount of time or preparing and submitting the loan documentation without error. This additional revenue is recorded at the time of settlement. In this example, the Company was able to meet the specified criteria and received an additional 0.5%, or $500, of incentive revenue. At the time of settlement, the investor thus paid 102.5% of the par value of the loan, or $102,500, to the warehouse bank. The warehouse bank retained $96,000 thereof and paid $6,500 to the Company. The Company recognized an additional $500 of revenue when the loan was settled. The journal entry at the time of settlement with the investor is as follows:

 
Cash
    $6,500
  
   
Mortgage loans sold to investors
  
   $5,500
   
Mortgage fee income – loan sales revenue
  
    500
   
Origination fee receivable
  
        500

If the loan is not settled by the investor, the Company repurchases the loan from the warehouse bank for 96% of the loan face amount, or $96,000. The Company recognizes the loss on the failure to settle the loan by reversing the loan sales revenue and recognizes the mortgage loan as an investment at its fair value on the date repurchased, which in this example is the par value of the loan. The journal entry to record the repurchase of the mortgage loan for investment purposes is as follows:

 
Mortgage loans on real estate
$100,000
  
 
Mortgage fee income – loan sales revenue
      2,000
  
   
Cash
  
$96,000
   
Mortgage loans sold to investors
  
    5,500
   
Origination fee receivable
  
       500


At the various dates as shown in the above tables, the Company repurchased mortgage loans from the warehouse banks that did not settle, recorded the mortgage loans repurchased as an increase to “Mortgage Loans Sold to Investors” and recognized the losses by reversing the loan sales revenue as shown in the above journal entries. On June 30, 2008, the Company transferred the mortgage loans repurchased from “Mortgage Loans Sold to Investors” to its investment account, “Mortgage Loans on Real Estate” with the following journal entry:

 
Mortgage loans on real estate
$36,290,743
  
   
Mortgage loans sold to investors
  
$36,290,743

 
 
 

November 6, 2008
Page 13 of 13
___________________________


 
5.
You state that the $36,291,000 of mortgage loans not sold to investors was included in the line item mortgage loans made within cash used in investing activities.  Based on your response, it appears that no cash was exchanged with third party investors to repurchase the loans.  Please tell us your basis for including this amount within cash used in investing activities, rather non-cash investing activities.  Refer to paragraph 32 of SFAS 95.

Response:

Upon further review, management has revised its response relating to the cash flows on the mortgage loans repurchased. As discussed in Response 4, a significant number and amount of the mortgage loans repurchased were sold to investors and repurchased during the year ended December 31, 2007, others were sold during 2007 and repurchased during 2008, and a few additional loans were sold and repurchased during the six months ended June 30, 2008.

For the mortgage loans sold and repurchased during 2007 in the amount of $24,740,179, the transfer to “Mortgage Loans on Real Estate” on June 30, 2008 was a non-cash investing activity. For the remaining mortgage loans sold during 2007 or 2008 and repurchased during 2008, the $11,550,564 paid during 2008 to repurchase the mortgage loans was an investing use of cash during 2008. The Company intends to modify its statement of cash flows for the nine months ended September 30, 2008 to properly disclose the mortgage loans repurchased during 2007 and transferred during 2008 as non-cash investing activities.
 
In connection with the Company’s responses to the comments, the Company hereby acknowledges as follows:

 
·
The Company is responsible for the adequacy and accuracy of the disclosure in the filing;

 
·
The staff comments or changes to disclosure in response to staff comments do not foreclose the Commission form taking any action with respect to the filing; and

 
·
The Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

If you have any questions, please do not hesitate to call me at (801)264-1060 or (801)287-8171.

 
Very truly yours,
   
  /s/ Stephen M. Sill
 
Stephen M. Sill
 
Vice President, Treasurer and
 
   Chief Financial Officer