Opaque Bank Accounting of Repossessed Homes may be a Problem
Last week, Diana Olick at CNBC Realty Check disclosed a potential problem with bank accounting of homes they have received in foreclosure. According to Rick Sharga of Realty Trac:
"The lenders are simply trying to defer the losses to a later date, because having to recognize the losses short term might pose severe risks to the banks in question."
What does that mean? Well, when the properties are taken back by the bank at auction, they are often taken back for the value of the mortgage on the property. The bank puts in the bid for the value of the current mortgage and essentially pays itself back what it lost on the loan, and of course gets the house for all its trouble. In good times, the bank could profit by selling that house for more than the value of the loan, but not these days. The trouble now is just the opposite. On so many of these foreclosed homes, the property is actually worth far less than the mortgage on it. So the bank is taking it back at the mortgage value and not writing it down.
"Untold numbers of these properties sitting on banks accounting ledgers where the imputed value is considerably higher than the market value," says Sharga. And unfortunately nobody knows what that market number is.This is a bank accounting trick that exposes the vulnerability of TARP and any blanket government bank rescue plans. Opaque asset accounting perpetuates the same ethos that allowed banks to make bad loans in the first place; now they can hide distressed assets until later and tap into future rescue funding. There is a lot more potential for "moral hazard" caused by bailouts than by the original Bernanke moral hazard statement in 2007 when he thought lowering interest rates would recreate the hazardous lending of the early 2000's.
Hi Pat,
While I generally agree with the sentiment of this article, banks are not opening the bidding at the mortgage value. Nearly 90 percent of loans are discounted at the foreclosure auctions, by an average discount of 33 percent. And nearly one third are discounted by 50 percent or more.
That said the accounting for these assets is clearly opaque, and it is completely unclear to me from the financials if these losses are being fully accounted for and if so, from where.
Best,
Sean
http://www.foreclosureradar.com
http://www.foreclosuretruth.com
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Thanks Sean, I notice the NY Times analyzes this dilemma on a larger scale -
Big Risks for U.S. in Trying to Value Bad Bank Assets
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Thanks for the NY Times link, hadn't seen it.
If only the following were true: "Not just billions, but hundreds of billions of taxpayer dollars are at stake."
My estimate based on household income and fed flow of funds data is that we need to wipe out about $4 Trillion in bad mortgage debt before we can return to a healthy housing market.
The problem in getting to agreement on the value of the assets is that many suffer from the delusion that prices can return to 2006 levels. No until everyone realizes those price levels were financially engineered fictions, and not supported by current household income levels will we be able to find agreement on realistic solutions.
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6 Months on from this article and its obvious the situation has only become worse. The world economy is in further debt and the bail out money is drying up. Every country's property market is suffering as a result.
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