Keeping Crap on the Books

Today’s Times’s story on banks reluctance to permit short sales (selling a house for less than the outstanding loan balance) contains this nugget:

Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.

When you look at bank opposition to cramdown, programs like HAMP that did little more than raise false hope, and the reluctance of banks to allow short sales, there’s a common thread: all of these efforts delay the bank’s declaration of loss. If bankruptcy judges could cramdown, if HAMP really did result in modifications, and if banks embraced short sales, banks’ balance sheets would be in much worse shape today. Banks are slow-playing anything that makes them re-value their mortgage portfolios, no matter what it costs mortgage holders or the how badly it delays the recovery of the housing market.

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53 replies
  1. 1
    Comrade Javamanphil says:

    Blow harder and that bubble will re-inflate. Heckuva a job, Galtian overlords. Thanks for not withholding your productivity. Really. We couldn’t have failed without you.

  2. 2
    cleek says:

    Lesson: if ordinary citizens want the laws to favor them, they should become bankers.

  3. 3
    chrismealy says:

    Banks not facing up to losses sounds a lot like Japan’s lost decade.

  4. 4

    In Anne Laurie’s post that quotes the piece by Joe Nocera the other side of the coin is exposed. B of A doesn’t want to take back to mortgage paper it most likely sold fraudulently to investors in bundled securities. But this quote from Nocera is truly telling:

    So there you have it. Having convinced millions of Americans to buy homes they couldn’t afford, Bank of America is now revving up its foreclosure efforts on these same homeowners. At the same time, having sold tens of thousands of these same terrible loans to investors, it is going to spend tens of millions of dollars on lawyers to keep from having to buy back their junky loans.

    The banksters want to slow walk this to keep shareholders happy. If you have money on deposit with B of A, or you own shares in B of A, you are enabling fraudulent activity or it is being done on your behalf. That statement may well be true of all banks that do business nationwide and have a mortgage division. Extend and pretend, indeed.

  5. 5
    Bullsmith says:

    “slow-playing” is an awfully gentle term for what the banks are doing.

  6. 6
    Comrade Javamanphil says:

    @Bullsmith: Quite. Instead of Barry White, wine and candlelight, we are getting it with Rammstein, Schlitz and strobe lights.

  7. 7
    Steve says:

    If a bank delays unnecessarily in bringing a foreclosure action, it seems like a pretty good deal for the homeowner, who gets additional time to either bring his account current or to simply live in the house without paying.

  8. 8
    Dave says:

    @Comrade Javamanphil:
    Thread won for the day. Shut it down, nothing left to do here.

  9. 9
    sparky says:

    once again, without feeling–

    3 of the 4 examples of banks behaving badly here were enacted by the Obama administration.

    banks behave badly (as in without regard to any measure of value than profit) but extend and pretend is Obama’s policy. focussing on the banks in this context is rather like the tea party folks claiming Obama is a soshulust.

  10. 10
    The Republic of Stupidity says:

    @chrismealy:

    Banks not facing up to losses sounds a lot like Japan’s lost decade.

    Ya beat me to it… I was just about to make that same point.

    And wouldn’t that be the plural there… ‘decades’?

  11. 11
    Punchy says:

    I’m sure the new GOP majority will address this grievance tout suite, to the benefit of ordinary Americans, and not banks.

  12. 12
    El Cid says:

    The problem is too much taxes and all the regulation. If we didn’t have so much debt and deficit, it’d all be right.

  13. 13
    TJ says:

    You really can’t totally blame the banks for the utter failure of HAMP. The Obama admin was in there pitching too.

  14. 14
    The Republic of Stupidity says:

    I’m waiting for a new law that protects banksters from their own malfeasance, making it illegal to go to court and sue one of ’em, no matter how egregious their behavior…

    W/ enough money, you can buy ANYTHING you want in DC these days… or so I’m told…

  15. 15
    WyldPirate says:

    @TJ:

    You really can’t totally blame the banks for the utter failure of HAMP. The Obama admin was in there pitching too.

    Hush, TJ. Didn’t you get the message? Criticizing the Obama administration is not allowed or the BJ zombie Obamabots will attack.

    Don’t wake them.

  16. 16
    Kirk Spencer says:

    I realized yesterday that underlying this, and in fact all the major decisions, is the supply vs demand stimulus debate.

    There is a side that thinks that protecting and boosting the suppliers will best keep the economy healthy.

    The reality, of course, is that it puts money in the hands of those who tend to save till they can afford really expensive things instead of actually moving the economy along.

    These point you made are just more of the same.

  17. 17
    Capri Sun-Bagger says:

    Steve: More time to work with banks that won’t negotiate, while the overdue payments and penalties wind-up at a phenominal rate. Given the choice between fucked and super-fucked, I’m not really seeing the benefit.

  18. 18
    daveNYC says:

    Extend and pretend is more a CRE one-liner, but the basic idea is the same. Delay taking any losses so that they can recapitalize over time. Something that the fed is helping them out with.

    Definitely a lost decade.

  19. 19
    TJ says:

    @daveNYC:

    If you substitute “rebonusize” for “”recapitalize” you’re right.

  20. 20
    Alex S. says:

    I don’t oppose these actions per se, they might help to deflate the bubble in a controlled way. Who knows how much of the financial system had been effectively broke if they had written off all their losses at once… But the inequal treatment of banks and house owners is bothering me. It wasn’t just banks living by the bubble, but people, too.

  21. 21
    Omnes Omnibus says:

    @WyldPirate: Actually, HAMP was/is a fucking mess.

  22. 22
    scav says:

    The problem is too much taxes and all the regulation. If we didn’t have so much debt and deficit, it’d all be right.

    well du-uh. you can’t break regulations that don’t exist. easiest way to stop crime is making everything legal. tricky part is making the rules that only apply to the punters on the other side of the table. give them their due, banks are getting close to that particular nirvana.

  23. 23
    MikeBoyScout says:

    6 figure performance bonuses all around for the banksters!!

  24. 24
    daveNYC says:

    I don’t oppose these actions per se, they might help to deflate the bubble in a controlled way. Who knows how much of the financial system had been effectively broke if they had written off all their losses at once…

    Um, no, they won’t help. What they’ll do is keep bad loans on the book of banks so that the banks won’t be able to loan money. Just like in Japan.

    We should have done what Sweden did. Temporary nationalization, clean out the books, wipe out the shareholders.

  25. 25
    TJ says:

    @WyldPirate:

    Obama and the Dems aren’t feeling the effects of the rampart mortgage fraud yet. That’s for 2012. Just like what’s happening now is the effect of too-small stimulus. Time delay.

  26. 26
    WaterGirl says:

    @Kirk Spencer: Have you been able to gain any traction in your effort to keep your house?

  27. 27
    gene108 says:

    General accounting practice is to record assets at historical cost, i.e. the price you bought it for.

    One of the main reasons for this is it is hard to determine the current value of many assets in an objective manner, because many factors may cause one asset – lets say a delivery van or house – to vary from another similar asset.

    If you accept a short sale you have determined the value of the asset in an objective manner.

    One of the main reasons banks are opposed to cram-down is the fact as asset values decrease on their books, they can no longer lend as much money and need to keep more cash in reserve to offset the loss of asset values, which hurts the bottom line.

    It’s a tough situation to be in because if you hurt current operations by writing down the value of houses on your balance sheet, you won’t be able to generate the revenues needed to make up for whatever you lost during the recession.

    If you write down the value of houses and maybe it allows some people a break on their mortgage, you end up hurting your current operations and so are less able to make loans, for example, which can have a ripple effect in the economy.

  28. 28
    Kirk Spencer says:

    @WaterGirl: Yes and no.

    I’ve got people talking. I’m working with an attorney, and someone from BoA is also talking to me. But I haven’t seen PAPER, and I’ve come to believe if it isn’t in writing it isn’t happening.

    Sale date is next Tuesday. Needless to say every ticking second reverberates.

  29. 29
    Capri Sun-Bagger says:

    gene 108: I know what you mean. So I say to Mable, I says: “You think you have it bad, try being a bank in this market!”

  30. 30
    WaterGirl says:

    @Kirk Spencer: Sounds like enough to give you hope, but not any security. I suppose it would make too much sense for them to delay a date when things are still actively being negotiated. This must be beyond maddening.

    For what it’s worth, if there were some sort of fund, I would be happy to chip in toward mortgage, attorneys, housing, whatever. It would be a small amount of money, but if 400 people each donated, say $25, that would be 10,000.

  31. 31
    The Republic of Stupidity says:

    @MikeBoyScout:

    6 7 … 8 figure performance bonuses all around for the banksters!!

    Cheapskate…

  32. 32
    WyldPirate says:

    @TJ:
    What they are feeling the effects of are:
    a. the too small bailout–which they were warned about,
    b.the ill-advised economic team of Geithner, Summers et all who played a role in getting us in the economic mess and the fact that they didn’t even look at the recent history of the 2002 economic downturn.
    c. over-optimistic exaggerations of the effect of their anemic recovery.
    d. piss-poor messaging on just about everything
    e. pissing away hundreds of billions of dollars needlessly in Afghanistan (not to mention the human carnage)

    dozens of other things not even listed.

    I know Obama has faced a tough road and has had to deal with obstructionism. However, many of his wounds have been self-inflicted. He deserves criticism for these.

  33. 33
    Martin says:

    Heh, they’re gambling on the same ‘housing always goes up’ bullshit that the loan brokers were peddling to the public to get them to sign those subprime loans.

    And that April 2009 regulatory change was far from obscure. When credit completely seized up and the scope of the ratings problem was fully realized, the market for mortgages – particularly non-conforming pretty much seized up as well. Market prices for mortgage-backed securities plummeted, and the valuation of those assets fell essentially to zero, which is completely unrealistic. The banks had to report (per accounting rules) that their assets were worthless which made them look like they were imploding far faster than they really were. That April 2009 ruling changed that and was instrumental to Geithner being able to do his stress testing of the banks.

    Bottom line, I think the decision to allow mortgages to be sold as securities has been an unqualified disaster. It led to the S&L scandal in the 80s, and now this. There are too many ways for loan brokers and originators to hide the true risk of a mortgage, they’re too large in volume to adequately rate, and you need to adopt an accounting rule that either pretends that holding a mortgage is the only thing you ever do, or is something you never do, and because the accounting model is what defines ‘reality’ for the market, it forces banks to behave in ways that are against their true best interests in order to satisfy the investors, which they truly can’t afford not to do.

    They’re never going to avoid these problems until they get back to treating mortgages much more like what they originally were. It’s a minefield that serves as a shortcut to profits. It’s just not worth it.

  34. 34
    Kirk Spencer says:

    @WaterGirl: heh – I’m no longer noble enough to refuse money. On the other hand I’ve not set up any such fund. (Yet. thinking…)

    On a slight change and for the entire list, BoA just muddied the water a bit more. The WSJ reports that BoA found 10 to 25 errors in the first few hundred cases reviewed and that some of the errors are minor.

    A few hundred is not a thousand, so that’s more than 1 to 2.5% of cases for judicial states for which the paperwork is wrong. In addition “some” is a very vague label.

    I’ve got me a suspicion that behind the scenes some people are buying antacids by the caseload.

  35. 35
    liberal says:

    @daveNYC:

    We should have done what Sweden did. Temporary nationalization, clean out the books, wipe out the shareholders.

    I disagree. IIRC, Sweden made the bondholders whole. Not forcing them to take a haircut would be both unjust and create moral hazard.

  36. 36
    BR says:

    @Martin:

    Heh, they’re gambling on the same ‘housing always goes up’ bullshit that the loan brokers were peddling to the public to get them to sign those subprime loans.

    I’ve been following three very different sources, who come at the question of the housing market from three very different perspectives Reggie Middleton (trading analyst), Chris Whalen (economic analyst), and Nicole Foss (The Automatic Earth – big picture analyst). All three for different but reinforcing reasons argue that we have at least 5 years, maybe more until we see a bottom in the housing market.

  37. 37
    BR says:

    @Kirk Spencer:

    Yeah, and BofA is saying that they found that many, it’s probably more. So I’m betting it’s like 15-20% erroneous, with half of that being serious.

  38. 38
    Tim Connor says:

    HAMP is a travesty, set up for the benefit of the banks. Try reading Atrios on this.

    Since it was Obama administration program, one might suggest that they bear some culpability for this…

  39. 39
    Perry Como says:

    @Kirk Spencer: I don’t know if your case involves MERS, but if it does, a class action suit was just filed against MERS in Georgia.

  40. 40
    TJ says:

    @WyldPirate:

    Not disagreeing, just saying the worst is yet to come for the Dems. The catfood commission, for example. And their inevitable tack to the right, which always works out so well.

  41. 41
    Kirk Spencer says:

    @Perry Como: I missed that, MERS is involved, and I’ll see if I can get in on it. thanks.

  42. 42
    Oscar Leroy says:

    programs like HAMP that did little more than raise false hope

    You forgot to blame that on someone besides Obama, Mistermix. How about Olympia Snowe?

  43. 43
    catclub says:

    @Oscar Leroy:
    He re-appointed Ben Bernanke! Idiot move, but ‘necessary’
    at the time to re-assure Wall Street. Just like only Republicans can manage the Defense Department, only Republicans – like Greenspan! can manage the economy.
    So far the Gates at Defense has not worked out horribly.
    But Bernanke at the Fed, plus not getting Obama’s appointees through the Senate, HAS been a disaster.

    Also, re: 5 more years of home prices before recovery.
    I have a chart made in late 2008 showing 2 giant peaks in mortagage resets. The first is in 2007-2008 and second is
    in 2011 – just in time to wreck the economy again.
    So I agree with the 5 more years estimate.

  44. 44
    daveNYC says:

    I disagree. IIRC, Sweden made the bondholders whole. Not forcing them to take a haircut would be both unjust and create moral hazard.

    Point is that we have a system in place to handle things like this, it’s calle bankruptcy. Shareholders eat the losses first, then prefered stockholders, and finally bondholders. (roughly speaking)

    Maybe you need to get the government involved as they did with GM’s implosion, but there are other, and better, options than just shoveling money into the hole and hoping things get better.

  45. 45
    WaterGirl says:

    @Kirk Spencer: Let me know if you set up a fund. I would gladly donate $25 to the cause.

  46. 46
    J. Michael Neal says:

    @Martin:

    Heh, they’re gambling on the same ‘housing always goes up’ bullshit that the loan brokers were peddling to the public to get them to sign those subprime loans.

    No, they aren’t. They’re counting on being able to generate enough profits in other lines of business that, as they eventually recognize the losses on these mortgages, it doesn’t make them insolvent.

    Once again, this is why I keep telling people that focusing on the income statement and saying that the fat profits means that banks are back in business and should be squeezed is wrong. The banks’ balance sheets are still a complete disaster, and large, consistent profits for them is the only thing that’s going to prevent us from ending up back in the fall of 2008.

    The people who say that the banks need to recognize all of their losses right now, so that we can go back to lending are just wrong. If the banks recognize all of their losses now, they go bust in large numbers and, in addition to there being no lending, the money market funds crash again.

    This is not to say that everything involved in the banks making profits is okay. There’s a lot of stuff around the foreclosure industry that’s not just a scandal, but evil. But when it comes to Treasury Department policy, that’s what is going on. They have to keep the spigots open.

    The other alternative is to take the big banks, and a lot of the small ones, into receivership. That seems to be what a lot of people want. Okay, smart guys, where are you going to get the money to do that? Do you really think that Congress is going to appropriate it? Right now, even though receivership is finally a legal option, it has no practical value.

  47. 47
    J. Michael Neal says:

    @daveNYC:

    Point is that we have a system in place to handle things like this, it’s calle bankruptcy. Shareholders eat the losses first, then prefered stockholders, and finally bondholders.

    Sure. Let’s just shove all the big banks into bankruptcy. Having all of their assets tied up in court for five years surely won’t cause major problems.

    Maybe you need to get the government involved as they did with GM’s implosion, but there are other, and better, options than just shoveling money into the hole and hoping things get better.

    Name them. Taking the big banks into receivership would have been illegal. Until the financial reform bill passed, the government didn’t have the authority to do this for anything but a straight up commercial bank. None of the big players fit that description. A lot of the most serious cases, like AIG and Bear Stearns, didn’t have a commercial bank at all.

    Now that legal authority exists, but the money to exercise it does not. I like the idea of financing the liquidation fund with a tax on banks, but that’s only useful in the long term. Right now, it would mean taxing the same institutions that need to be liquidated, and so of every dollar raised, a large portion of it (that money taxed from insolvent banks) just gets added onto how much money the liquidation requires. The only way to do it is for Congress to approve spending hundreds of billions of dollars. Good luck with that.

    So, the only option left for the Treasury is to find a way to make sure that bank profits can keep up with the erosion of their balance sheets.

  48. 48
    Perry Como says:

    @J. Michael Neal: So what is your suggestion? Turn a blind eye to the systemic fraud? We have depositions of people admitting they committed 400-500 felonies per day. That’s only the most recent revelation. There would be a lot less people calling for receivership if the crooks were actually being held accountable. Instead they get called geniuses and get $144 billion in bonuses. And now the poor and working classes are being told they need to tighten their belts and stop being such leeches.

    Fuck the banks.

  49. 49
    inthewoods says:

    Side effect of dismantling mark-to-mark account rules? Seems to me the banks would have been forced to move if those rules had been kept in place.

  50. 50
    Anton Sirius says:

    @Perry Como:

    What JMN is saying is that the banks as institutions need to be propped up. He’s not saying anything about prosecutions of bank employees or executives.

    In theory, both should be happening.

  51. 51
    futzinfarb says:

    @MikeBoyScout:

    This, in fact, is PRECISELY the problem. The compensation mechanisms currently in place are actively undermining the economy. They perversely incentivize counterproductive business decisions. I am firmly convinced that until this is broadly recognized and addressed we are well and truly screwed. “Call for Alan Greenspan, there’s a flaw in the free-market, Alan Greenspan please pick up a white phone ….”

  52. 52
    SciVo says:

    No really, they’re following their incentives? Goodness, hoocoodanode?! Perhaps we oughta change their incentives.

    @gene108: That’s at least half bullshit. Banks are all over mark-to-market while bubbles are inflating. It’s only when their assets are declining in value that they cry no no, mark-to-market is the devil.

    Extend-and-pretend is a perfectly valid strategy in a business cycle recession (because of the “cycle” part of the equation). This is a debt bubble popping, and the banks really are insolvent. No really, we’re talking a decade or two. Their asset values aren’t fucking coming back.

    Failing to recognize and deal with reality will help the investment banks’ few major stockholders at the expense of the rest of the world. Maybe that seems reasonable to you, but not to me.

    There are procedures for dealing with insolvent banks so that currency will be freed up to circulate properly. If human people are merely given back the bankruptcy tools that corporate people still have for reorganizing their debt to its true value, then those tools will be used and life will go on.

  53. 53
    Eli says:

    I agree with #5, Bullsmith. That’s way too polite of a word for what some banks have done to people.

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