The giant US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators. They are allowed to accrue interest on non-performing mortgages � until the actual foreclosure takes place, which on average takes about 16 months.Purposeful Delays to Inflate Earnings?
All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a result, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks.
This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed.
Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans, suggests Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.
Some people accuse banks of purposely delaying foreclosures for profit. The idea is complete silliness.
Might banks take advantage of ludicrous accounting rules during the foreclosure process? Sure, on that score we can expect them to. It is one of many reasons bank earnings estimates are not believable. In turn, S&P 500 earnings estimates are hugely overstated as well, with obvious implications on the already rich valuation of the US stock market.
However, taking advantage of accounting rules and purposeful delays are two different things. Delays cost banks money and they know it. It's even worse now that home prices are falling again.
Ironically, the same set of do-gooders who accuse banks of delaying foreclosures are doing everything they can to throw wrenches in the foreclosure process with "show me the note" and other delay tactics. They cheer every court case that delays foreclosures for any reason.
In contrast, I think the faster we work through foreclosures, the quicker housing bottoms.
States that force a workout process contribute to the delays, ultimately adding to bank losses, while not necessarily doing anything good for the "winner" of a loan modification. Most end up defaulting anyway. How can that possibly be a good thing, for either the lenders or those getting loan modifications?
I am all in favor of workouts if lenders feel it is in their best interest to do so. When lenders voluntarily agree to workouts, it is probably in everyone's best interest for the simple reason that a conscious decision based on facts and likely probabilities is better than mandated nonsense.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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