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.Source
They are allowed to accrue interest on non-performing mortgages ” until the actual foreclosure takes place, which on average takes about 16 months.
All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a resullt, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off gthe 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.
The potential writeoffs could be even larger should home prices continue to weaken, placing more homes in the nomnperforming category on bank balance sheets.
About 6 million homes are still at risk, according to Schnapp, and at least 10% of them are 25% underwater, meaning their market value is 25% less than the mortgage– but the owners are still paying interest to their banks
Remember, banks are the enemy.
Not that I am a fan of Banks but here in Canada posting interests from non-performing loans would not be permitted. There is a reason why it has been about 80 years since the last Canadian Bank failed and why it is so common in the USA. US banks seem driven by a week to week assessment of the balance sheet and people are promoted, transferred, hired and fired on day by day portfolio performance. The slightest down-tick on performance will send bank stocks sliding so the tendency will be to under-report all the time. Of course no one gives a damn about the family that is about to get tossed and move to a dog hut somewhere.
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