Thursday, January 13, 2011

U.S. Banks Are Reporting Phantom $1.4T on Interest From Foreclosed Properties: Massive Losses Coming

Robert Lenzner of Forbes writes that US banks have been reporting phantom $1.4T in interest on bad morgages, Basically mortgages that are going for foreclosure (but have been delayed, or they are just going through a long slow process) can still accure interest, even though that interest will never be paid. In other words, the losses at the banks are much larger and you cannot trust their financials.

In fact it can get worse because house prices continue to fall.

This is  a massive amount of money, even by today's bailout standards.

Says Lenzer: banks are being... "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.

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.
The potential writeoffs could be even larger should home prices continue to weaken, placing more homes in the nonperforming category on bank balance sheets.

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1 comment:

Kronos said...

Interest due on $1.4 trillion of face value mortgages, as Lenzner claims in Forbes, does not equal $1.4 trillion in interest on bad mortgages, as shocked investor claims. The actual amount of unpaid interest would be a function of (a) the interest rate of the mortgage and (b) how long that interest has not been paid. It is possible that the unpaid interest amount might equal the $1.4 trillion face value, but pretty unlikely.

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