Jul232013
Is distressed house inventory actually twice as large as commonly reported?
One of the contentious issues between housing bulls and bears is the existence of shadow inventory. Many bulls deny this inventory exists, and those that acknowledge it deny its impact. Many bears claim this inventory is much larger than reported, and some claim it will be unleashed on an unsuspecting public leading to catastrophic price declines.
One of the main problems with shadow inventory is defining exactly what it is. There is no commonly accepted definition. Corelogic has the most widely accepted definition which includes the number of distressed properties not currently listed on the MLS that are seriously delinquent, in foreclosure, and REO. Shadow inventory has been declining largely due to the can-kicking loan modifications with their 40% failure rate temporarily lowering the delinquency counts.
My definition of shadow inventory is outlined in the graphic below. After a borrower becomes delinquent, there is customarily a small window between their first reported delinquency and when the lender files the first notice of default. Prior to the collapse of the housing bubble, this first NOD went out 90 days after the borrower quit making payments. Once lenders became overwhelmed by the volume of delinquent borrowers, these timelines got extended, often for many years.
The borrowers who are not paying their mortgage, yet haven’t received a Notice of Default are what I consider the true shadow inventory. We know these people exist for several reasons. First, the number of loans more than 90 days delinquent is much larger than the total number of homes in the foreclosure pipeline. Estimates vary widely, but the obvious discrepancy between the two figures proves this inventory exists. And of course, the anecdotal evidence is seen every day on this blog where borrowers have been allowed to squat for years before the banks got serious and booted them out. I only do one post per day, so we only see the tip of a much larger iceberg.
Survey: 54% of YouWalkAway Clients Past Due but Not in Foreclosure
07/18/2013 By: Esther Cho
YouWalkAWay.com, a national foreclosure agency, recently released a June 2013 survey of its customers and found 54 percent are in pre-foreclosure, meaning they have defaulted on their mortgage but have not received an official foreclosure notice.
Percentage of YouWalkAway clients in pre-foreclosure and average number of months past due. Source: YouWalkAway.com
Be certain you understand the ramifications of this. In California only 59% of their clients have received a notice of default. That means 41% have not. For every six borrowers that show up foreclosure filings, four delinquent borrowers are missed.
The share is down from 2012, when 85 percent of YouWalkAWay clients reported they were in pre-foreclosure.
The can-kicking and endless loan modifications are having impact. This is the group lenders have been reaching out to and begging to make some kind of payment. Lenders know they have no leverage because their threats to foreclose are empty, so they keep improving the deal hoping a few more delinquent mortgage squatters will bite. Rising prices and improved loan modification terms are motivating some to start paying again.
On average, clients who were in pre-foreclosure were 20 months behind on their mortgage payments.
According to the agency, pre-foreclosures are typically unaccounted for since reliable data is hard to find. However, YouWalkAway was able to compile pre-foreclosure data based on its client base to gain a better understanding of how prevalent this type of “shadow inventory” might be.
Data from the agency revealed Georgia has the highest share of YouWalkAway clinets in pre-foreclosure, at 82 percent. On average, clients in the state were behind by 18 months, but still haven’t been served with an official foreclosure notice.
Nevada still has a whopping 79% of its delinquent borrowers who haven’t been served notice. I wish these would come to market and give investors like me a chance to buy them.
In Minnesota and Arizona, 79 and 74 percent of clients, respectively, were in pre-foreclosure status. Customers in those states were behind by over 20 months.
The state that saw the biggest year-over-year decrease in clients in pre-foreclosure inventory was Florida, where 23 percent of clients were in pre-foreclosure, down from 45 percent in 2012. The average number of months past due though increased from 17 months in 2012 to 23 months in 2013.
Whatever the shadow inventory numbers really are is not the big issue, it’s what the lenders are going to do about it that’s important.
What will happen to shadow inventory?
As I stated at the start of this post, “Many bulls deny this inventory exists, and those that acknowledge it deny its impact. Many bears claim this inventory is much larger than reported, and some claim it will be unleashed on an unsuspecting public leading to catastrophic price declines.” Let’s take these contentions one at a time and make an educated guess as to what will happen.
First, “Many bulls deny this inventory exists.” Anyone who makes this statement is either an NAr shill, dangerously misinformed, or completely clueless. It’s not possible to argue with a person who states this because there is no agreement on facts. They are simply wrong.
Second, “Many bears claim this inventory is much larger than reported.” Keith Jurow makes a strong case that shadow inventory is widely underreported. The banks don’t have any incentive to provide accurate data to CoreLogic, particularly if that information is scary to the general public. However, nobody can definitively say how many borrowers are delinquent, and we are forced to accept the word of those who compile what data we have.
Third, “some (bears) claim (shadow inventory) will be unleashed on an unsuspecting public leading to catastrophic price declines.” I used to believe this. The change in accounting rules in 2009 which allowed shadow inventory to exist at all made this outcome less likely. However, for another three years, lenders still processed far more foreclosures than the market could absorb, and market prices kept dropping. When put together with an industry-wide effort to can-kick with endless loan modifications, lenders finally dried up the MLS inventory and changed the nature of shadow inventory completely.
Fourth, “(Many bulls) that acknowledge (shadow inventory) deny its impact.” I used to believe shadow inventory was going to be a real problem, but I have since changed my mind. Back in March, I wrote the groundbreaking post, Must-sell shadow inventory has morphed into can’t-sell cloud inventory. I believe the banks have found a way to successfully liquidate without causing a price crash — they simply withhold all houses from the market until market pricing brings them back above water. Of course, this allows for an enormous amount of delinquent mortgage squatting, but the banks reason that is superior to them taking a loss, so they allow it.
So what would make prices go down?
We know house prices drop when must-sell inventory comes to market, but the policies of lenders have removed most of the must-sell inventory from the market. Even if interest rates go up and peak prices become unfinanceable, so what? Lenders will just wait until wages catch up. They have no reason or incentive to process foreclosures. Even if the sales volume plummets and nothing sells because nobody can afford what the bank wants to get, so what? The banks don’t care. Just like the Irvine Company didn’t care if they sold anything from 2007 to 2009, the banks won’t care if even one house sells if it prevents them from taking a loss. Unless the realtor lobby somehow applies pressure on the banks to release some inventory, the market may seize up, but the banks can largely stop prices from going down by maintaining their stranglehold on the MLS.
Can withholding inventory solve all the bank’s problems?
Banks withhold inventory from the MLS in three ways. First, they give loan modifications to any underwater borrower that asks to keep them making a payment while prices rise back to peak levels. Second, they deny short sales to underwater borrowers with the assets to repay the loan balance (those they still have leverage over). 
And third, the allow delinquent mortgage holders who refuse to agree to loan modifications to squat until the property values rise to the outstanding balance of the loan. This policy is very effective and drying up the MLS inventory (see: Low housing inventory is an indicator of residual mortgage distress, and Las Vegas: a case study in successful housing market manipulation)
So can this policy take them all the way back to peak pricing and complete liquidation of all distressed loans? That’s where we have to get in order for the banks not to be burdened by $1 trillion in unsecured mortgage debt. So let’s run these policies forward and speculate on what will happen.
“First, they give loan modifications to any underwater borrower that asks to keep them making a payment while prices rise back to peak levels.” In my opinion, banks can repeat this endlessly. We know they’ve already given some borrowers multiple loan modifications, and the borrowers keep re-defaulting. I see no reason they can’t modify these loans over and over again as they have already been doing, so it looks like that one can go on forever if necessary.
“Second, they deny short sales to underwater borrowers with the assets to repay the loan balance.” This is what lenders should have been doing in the first place. This is what they would do under normal circumstances, so I see no reason they wouldn’t continue this policy in the future. They can effectively keep inventory off the market indefinitely. At some point, loanowners might strategically default to move for a job or a variety of other reasons, but that won’t stop the bank from going after them in debt collection for their assets.
“And third, the allow delinquent mortgage holders who refuse to agree to loan modifications to squat until the property values rise to the outstanding balance of the loan.” This is where it gets dicey. Lenders have been doing this for six or seven years now. The vast majority of those more than 90-days delinquent were loans originated from 2004-2007, and many of these have been delinquent from 2007 to 2009 until now.
Lenders have been able to sustain delinquency rates north of 10% because they have almost no carrying costs. They borrow money for nothing from the federal reserve, and they pay depositors next to nothing. As long as interest rates remain low, there is no reason to think they can’t keep squatters in their houses.
Long-term delinquency tends to promote strategic default. As the word gets out that borrowers can obtain free housing by simply stopping payment, many borrowers chose to do so. It’s one of the reasons places like Las Vegas have such atrocious delinquency rates. Word spread, and so did the delinquencies. However, with rising house prices, strategic default slows down. Loanowners start to see a light at the end of the tunnel, and many who were contemplating strategic default instead chose to keep paying with the hope of future equity.
Where this policy runs into problems is what happens when interest rates go up, or house prices stop going up. What happens if these borrowers never get back above water? Will the banks eventually foreclose and absorb the losses? I think they will have to, but if they delay it long enough, the amount will be so small they can afford to take the hit. In the meantime, I may be covering stories of squatters who spent their entire adult working lives without a house payment courtesy of a bank trying not to take a loss.
$500,000 Ponzis
The rewards some people got for merely buying Southern California real estate is truly breathtaking. The fact that they squandered this money and lost their homes is equally breathtaking.
- The former owners of today’s featured property paid $217,000 on 5/26/1994 using a $203,150 first mortgage and a $13,850 down payment.
- On 2/27/1998 they refinanced with a $200,000 first mortgage. So far, so good.
- On 7/6/1998, the took out a $35,000 stand-alone second. This was their first taste of Ponzi money, and it appears they liked it.
- On 7/8/1999 they refinanced with a $235,000 first mortgage, and took out a $97,458 stand-alone second mortgage.
- On 12/27/2001 they refinanced with a $348,000 first mortgage.
- On 8/28/2002 they refinanced with a $350,000 first mortgage.
- On 8/19/2003 they opened a $100,000 HELOC.
- On 5/15/2005 they refinanced with a $550,000 first mortgage.
- On 7/12/2005 they obtained a $175,000 HELOC.
- On 4/24/2007 they refinanced with a $660,000 first mortgage.
- On 6/11/2007 the opened a $123,750 HELOC. That’s when the housing ATM was shut off.
- Assuming they maxed out the final HELOC, total property debt was $783,750, and total mortgage equity withdrawal was $580,600.
Since these borrowers were obviously Ponzis who came to rely on the free money provided by a bevy of stupid lenders, when the housing ATM was shut down, they struggled with the mortgage. The quit paying the mortgage sometime in 2009 and were finally served notice in early 2010. The bank let them squat for another year before finally foreclosing in February of 2011. Then the bank sat on the property for a year and half waiting for prices to rise.
These people only put $13,850 down, and they extracted $580,600, plus they got to squat for two years.
Bank robbery has become much more sophisticated in the 21st century.
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”OC13139253″ showpricehistory=”true”]
26611 MORENA Dr Mission Viejo, CA 92691
$572,250 …….. Asking Price
$217,000 ………. Purchase Price
5/26/1994 ………. Purchase Date
$355,250 ………. Gross Gain (Loss)
($45,780) ………… Commissions and Costs at 8%
============================================
$309,470 ………. Net Gain (Loss)
============================================
163.7% ………. Gross Percent Change
142.6% ………. Net Percent Change
5.0% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$572,250 …….. Asking Price
$114,450 ………… 20% Down Conventional
4.37% …………. Mortgage Interest Rate
30 ……………… Number of Years
$457,800 …….. Mortgage
$112,241 ………. Income Requirement
$2,284 ………… Monthly Mortgage Payment
$496 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$119 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,900 ………. Monthly Cash Outlays
($428) ………. Tax Savings
($617) ………. Principal Amortization
$182 ………….. Opportunity Cost of Down Payment
$163 ………….. Maintenance and Replacement Reserves
============================================
$2,200 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,223 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,223 ………… Closing Costs at 1% + $1,500
$4,578 ………… Interest Points at 1%
$114,450 ………… Down Payment
============================================
$133,473 ………. Total Cash Costs
$33,700 ………. Emergency Cash Reserves
============================================
$167,173 ………. Total Savings Needed
[raw_html_snippet id=”property”]
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There is definitely shadow inventory out there. But, the trick is to find where it is. Some zip codes have none at all. Other zip codes contains a substantial amount. Before you do a purchase it is key you get a handle on it. If it exists in the zip code you are interested in, then DO NOT BUY there.
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IR – do you still hear from Keith Jurow?
2 years ago, he was saying we were on the verge of devastating losses (like 50%), and for whatever reason, I believed him, spreading his message among my family members.
None of them believed me, and all it did was lead to trading accusations of who was “delusional”. In the end, I alienated some of them, and ended up eating a massive plate of crow – it was a humiliating experience.
You would think being so stunningly wrong would cause Jurow to temper his calls, explain why the 50% losses he promised did not happen, etc. Yet, his site still tells people to “prepare for the coming devastating collapse”
I often wonder how long he will continue to mislead people before he decides “gee, I guess its just not going to happen”…
Great post Cory. It’s an embarrassment that Keith Jurow still gets quoted.
Extreme bulls and extreme bears always get quoted because it’s interesting. Personally, I think it’s an embarrassment that Lawrence Yun still gets quoted, but despite being wrong pretty much all the time, the chief economist for the NAr will always be quoted because they generally tell people what they want to hear.
Personally, I think it is embarrassing that Ben Bernanke gets quoted.
The difference is we understand that Lawrence Yun is a spokesman for a trade group whose job it is to sell homes. People like Keith Jurow have influence on people’s decision making and unfortunately, real consequences on their lives when he gets it so terribly wrong. He’s supposed to be an unbiased analyst, unlike Lawrence Yun, so I think your comparison is off.
Last I heard there were 10 years of shadow inventory backlog in New York, which means at the current rate of completed foreclosures, there will be no tsunami of distressed inventory. The banks can’t influence the timeline as the judges, lawyers, and politicians in New York have figured out how to make it take 1,000 days to foreclose.
We have a printing press which can inflate nominal prices while delaying the results of insolvent individuals, businesses, financial institutions, municipalities, states, and the federal gov. Some mistake this as “recovery” or “real estate cyclicality”.
Jurow will be proven correct in real terms as the shit storm continues to unfold here in the US:
http://www.zerohedge.com/news/2013-07-23/cyprus-real-estate-prices-post-record-plunge
Cory, I watched one of Keith’s presentations on youtube. While he has lots of facts and they are probably true, he (and many others) underestimated that the laws of economic gravity could be suspended for an indefinite amount of time. Some of these deadbeats have been living free in their fancy NYC digs for over half a decade.
I too ate a bunch of crow after presenting facts and arguing with many people regarding the housing bubble. Housing in certain areas will be supported at all costs period.
underestimating the stupidity of the herd may feel like eating crow, but in actuality it is not.
facts are facts, fundamentals are fundamentals, and no one – not even the Almighty Fed itself – can fight market forces forever.
It will happen. it just may take longer than expected. Strong dollar policy!
facts are facts, fundamentals are fundamentals, and no one – not even the Almighty Fed itself – can fight market forces forever.
——————-
it will not end well !
John Rubino and Gordon T Long explore what unprecedented Global Debt Levels and Fiat Currencies have meant to the Kondratieff Long Wave and the “Winter” it predicts we should now be experiencing.
http://www.safehaven.com/article/29715/the-kondratieff-winter-of-discontent
So many people think of the fundamentals as expressed in dollars. Residential real estate may keep rising in nominal dollars, and fall in terms of real dollars or value/productivity, that scenario is my projection.
This just in… banks have successfully performed plastic surgery on a pig.
I hear from Keith Jurow frequently. He sends me his monthly updates on what’s happening in the Northeast. He still firmly believes a bigger crash is coming. From his perspective in the Northeast, shadow inventory is still widespread, banks are way behind of foreclosure processing, and prices are currently dropping. He is probably right in believing more pain is ahead for the Northeast.
Where I think Keith gets it wrong is that he extrapolates his local conditions nationally, and he doesn’t fully get that the loan modification can-kicking is working. It isn’t working well were he is because the foreclosure backlog is so large, but it is everywhere else. He still believes the shadow inventory will hit the market in force, but after five years of crushing the market, the banks finally figured out how to control inventory. He doesn’t believe they can keep it up.
I am a buyer waiting on the sidelines since 2010. With not much inventory out there, or inventory at WTF asking prices, i’m forced to stay out. In the meantime, my downpayment has nearly doubled (when including my wife’s income). We have over 200k for a down payment. We no longer care if the banks withhold all their inventory or if the prices go up for the little houses out there. We’ll just continue to rent and sacrifice our lifestyle until we can find something that isn’t WTF and doesn’t have 100 offers, or become cash buyers.
If the banks don’t want my money in terms of the potential interest accrued on the loan (e.g. 400k) then they just need to continue what they are doing. In approximately 3 years, we will become all cash buyers or damn close. I know I might be a unique case, but I’ve read into similar situations from others who are just renting. Furthermore, those that are currently not paying and delinquent, can now put all their money into savings, and also become cash buyers (maybe move to another state and pay in full).
People like you will benefit from rising interest rates. Your monthly cost of ownership may go up, but that’s what will remove from the market all those marginal buyers with funny money who were competing with you. I think many in your circumstances will buy houses this fall and winter. It’s what will probably prevent prices from declining despite higher interest rates.
Ditto.
Mirage2123, my husband and I have been waiting as well while putting money aside for a larger down on a 450/500K house in the state of Georgia. By the end of the year we’ll have a little over 400K.
If we wait, by the end of next year we’ll have over 500K. We’ve decided to wait and just buy cash unless the deal of the century comes along and we finance very little and pay it offf asap.
We are still ten years from retirement, so we’ll rent the property in the meantime while we continue to live in the house we have in Miami, Florida. The new house will be large enough to convert the terrace level into a two bedroom rental for supplemental income.
While we work the last ten years we’ll take it easy traveling and investing the rest. It sure feels good being able to tell the banksters to stick it where the sun doesn’t shine.
))
I love hearing success stories. Not being sarcastic, I really like hearing them.
I agree. It speaks to the quality of daily readers on this site.
From ZeroHedge…..A must read
No Country For First-Time Home Buyers
There was a time when the US housing market was not “driven” by hedge funds armed with government-subsidized, “REO-to-Rent” loans loading up on distressed properties, by banks refusing to release foreclosed properties into the market (thus creating a market subsidy) or by foreigners eager to park their “tax-evaded” wealth with the Anti Money-Laundering exempt National Association of Realtors. Instead, the main driver of US housing were first-time home buyers, “typically couples in their late 20s or early 30s” who historically have accounted for about 40% of home sales. Alas, last year, and all throughout the New Normal, this number has been about 25% lower, or representing just 30% of all sales (except for a brief spike to 50% in 2009 courtesy of recession-era tax credits). Then again, what 30 year old needs a home when one can now get an E-trade terminal under the bridge to generate “the wealth effect”?
The WSJ’s take: “The depressed level of first-time buyers could prove to be a drag on the housing rebound and the broader economic recovery over the longer haul. First-time home buyers are the foundation of the real-estate market and are major contributors to their local economies, often buying up older homes, revitalizing communities and spending money on furniture and renovations.”
“I may be covering stories of squatters who spent their entire adult working lives without a house payment courtesy of a bank trying not to take a loss.”
Are the squatter paying property taxes? Is it the only bill they are paying? After 5 years Orange County will finally tax default on your house and sell it at an auction.
Also, I have to image there are some serious maintenance issues on some of these homes after 5 years of squatting. I don’t think a squatter is going to put $15,000 on a new roof. When the bank finally have to sell these homes they might $50K or even $100K of deferred maintenance.
That’s when the bank turns around and sells the property “as-is”, abdicating them of any responsibility for deferred maintenance.
I thinking in terms of the sale price (not responsibility) when the banks finally liquidate the home. The banks are holding on to these homes expecting $650K at the sale, but now with deferred maintenance the home is now getting $575K. I was thinking the other day, that a renter losses his deposit and landlord could seek damages if they are a bad tenant. The loanowner can do all sorts of damage and not worry about, since they technically still own the place. I just wonder if the banks are taking this in to consideration when they loan mod the house for 5 to 7 years. They still might up with the same loss, if they would have just foreclosed in the first place instead of waiting for the market value to increase.
As long as the bank holds on to the loan or asset, the bank can value the asset at par, so why in the world would they foreclose or sell at a loss.
With higher mortgage rates coming values will drop. While this waiting is occurring the house is decaying, the bank is paying insurance, and property taxes. Take your loss now or a big loss later. No way the bank is getting it’s money back.
Yup ran into that exact thing. I had to qualify with the sellers lender which I found out was the seller. I already sent my paperwork but I was gonna go with my own lender anyway. I had more calls from the selling lender making promises to the moon. That put me off. After having the inspection the house needed 50-60 k worth if true repairs from non maintenance. Make a long story short we walked away. Pretty much EVERY house we looked at was a pig with lipstick. They ALL needed a ton of work.
You can play the game but things have a way of coming around and biting you in the butt.
I have wondered about the same (property tax) issue.
Are not property / local taxes superior even to a 1st Trust Deed?
I wonder what % of those delinquent on the YouWalkAway chart still pay property taxes to avoid “earlier” foreclosure?
Maybe a solution to squatting would be for local governments who collect property taxes to be more aggressive with collections (and hence force foreclosures) irregardless of what the banks want.
Would it not be to the advantage of local government to do so, since property tax collections would only increase local revenue?
Further, since delinquent properties tend to go unmaintained, would not early foreclosure forced by local governments help with blight?
Seems like win-win for everyone except the banks.
You have some interesting ideas here.
FYI – Banks will pay the property tax to prevent a tax sale from occurring unless the property is worthless, like in Detroit. In that case they will let the county foreclose and get the liability off their books.
Presently, banks are allowed to value their properties at the loan amount. Property and mortgages are listed as assets per bank GAAP. The banks have little to no reason to get what we think of as a “liability” off their books.
There seem to be many who continue to think that the banks will have to foreclose and start selling foreclosed properties any minute. Y’all need to understand that the banks do not have to foreclose and do not have to start selling foreclose properties, and have every reason not to. No amount of wishing or hoping or waiting will change this. Where is Lee of Irvine? Somewhere he has that quote.
Found the quote:
“You will continue to be wrong as long as you look at the possibilities through the lens of desire rather than the harshness of reality.”
When a bank services a loan for others, they accrue no GAAP benefit as you describe. It’s a liability because it takes resources to monitor the property’s condition, tax liabilities, city/county/state regulations, etc.
“Where this policy runs into problems is what happens when interest rates go up, or house prices stop going up.”
Aye, there’s the rub: How do you make a 2012 3.5% loan more affordable when prevailing rates are 5.5%? Other than extending the term, neg-am, I/O, ARM, or teaser rate there aren’t any other options. Even if the loan is modified into one of these products, rising rates will make the default worse later on.
Keep in mind that the banks can only influence housing prices, they can’t set them. They aren’t the only spigot filling the tub. If they shut their valve completely, the tub will find its own level based on organic equity sales. Once the new maximum housing prices are set, any opening of the bank’s valve will increase inventory and lower prices.
The organic market prices are most influenced by incomes and rates. Those two factors will set maximum prices in the future since the banks have chosen to more or less remove themselves from the equation. As incomes rise, loan balances are reduced through amortization, and rates are held in check by a sluggish recovery, we will see more of the cloud inventory become actual inventory as the market supply broadens over the next few years.
That is what will probably start leaking more inventory on the market. Unfortunately for the banks, most of their loan modifications have interest-only payment terms. They didn’t want to give up the income from the assets, so they set these loan modifications up to maximize their profits. This stops those loans from amortizing, and it will cause them to keep much of their cloud inventory in the clouds while the rest of the market undercuts them.
I would think people who really know how to read bank balance sheets would be able to make some good estimates of the true extent of shadow inventory. If the loan is not performing the bank MUST reclassify the loan and boost reserves to off-set potential losses on the loan. I’m not so good at the accounting thing myself, but someone who knows should be able to figure this out.
I think the changed the non-performing rule, then they change mark-to-market accounting. From Wikipedia:
On October 10, 2008, the FASB issued further guidance to provide an example of how to estimate fair value in cases where the market for that asset is not active at a reporting date.[20]
On December 30, 2008, the SEC issued its report under Sec. 133 and decided not to suspend mark-to-market accounting.[21]
On March 9, 2009, In remarks made in the Council on Foreign Relations in Washington, Federal Reserve Chairman Ben Bernanke said, “We should review regulatory policies and accounting rules to ensure that they do not induce excessive (swings in the financial system and economy)”. Although he doesn’t endorse the full suspension of mark to market principles, he is open to improving it and provide “guidance” on reasonable ways to value assets to reduce their pro- cyclical effects.[22]
On March 16, 2009, FASB proposed allowing companies to use more leeway in valuing their assets under “mark-to-market” accounting, an act that could ease balance-sheet pressures many companies say they are having during the economic crisis. On April 2, 2009, after a 15-day public comment period, FASB eased the mark-to-market rules. Financial institutions are still required by the rules to mark transactions to market prices but more so in a steady market and less so when the market is inactive. To proponents of the rules, this eliminates the unnecessary “positive feedback loop” that can result in a weakened economy.[23]
Forgot One:
On April 9, 2009, FASB issued the official update to FAS 157[24] that eases the mark-to-market rules when the market is unsteady or inactive. Early adopters were allowed to apply the ruling as of March 15, 2009, and the rest as of June 15, 2009. It was anticipated that these changes could significantly increase banks’ statements of earnings and allow them to defer reporting losses.[25] The changes, however, affected accounting standards applicable to a broad range of derivatives, not just banks holding mortgage-backed securities.
“If the loan is not performing the bank MUST reclassify the loan and boost reserves to off-set potential losses on the loan.”
NO, the bank is not required to reclassify the loan. GAAP for banks is different that any other business. What most businesses consider assets, banks consider liabilities and vice-versa. Banks are regulated by the Federal Reserve, a private corporation, the shareholders of which are the member banks. Banks report non-realized mortgage payments as income, the only business allowed to by GAAP.
[…] interesting) Is distressed house inventory actually twice as large as commonly reported? – OC Housing News – One of the main problems with shadow inventory is defining exactly what it is. There is no […]