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James Quinn is a senior director of strategic planning for a major university. James has held financial positions with a retailer, homebuilder and university in his 25-year career. Those positions included treasurer, controller, and head of strategic planning. He is married with three boys and... More
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  • WE'RE NOT IN KANSAS ANYMORE 6 comments
    Sep 1, 2009 11:56 AM

    The banks in this country cannot click their heels together and go back to the way it was. People can't pay their mortgages. Pretending they will in 6 months, won't make it so. Thousands of banks are pretending that their mortgage loans are not worthless. They don't have to write it off unless they foreclose or no one has made a payment in 180 days. Their solution is to not foreclose. So, millions of deadbeats continue to live in houses without making their mortgage payments. The bank hopes things will get better. They're not. It is getting worse. At 180 days they will have to take the loss. The government will say we must keep the banks alive or we will have systematic risk. They will funnel billions more of your money to the zombie banks, so moronic deadbeats can still stay in houses without paying.

    Got it? The prudent pay. The profligate receive. Case closed.

    Postponing the Day of Reckoning

    By Kate Berry, American Banker

    August 26, 2009

    Pick up just about any city's newspaper or turn on any news show, and if the topic is real estate, the banking industry is likely being lambasted for foreclosing on troubled homeowners.

    But industry data and anecdotal evidence suggest banks and servicers have been dragging out the process – not rushing to kick people out of their homes.

    Granted, the deferrals may not be motivated by compassion, or even political pressure. Rather, banks and mortgage investors want to avoid repossessing hundreds of thousands of homes, which would produce losses and hits to capital.

    "The goal is to hold off on foreclosures and take losses as slowly as possible to keep balance sheets up," said Deborah Voelz, the chief financial officer of National Asset Direct Inc., a New York buyer and servicer of distressed loans. "Everyone is looking at what the ultimate loss is going to be and whether it makes sense to hold off another year or two and mitigate the results."

    The foreclosure process -- and it is a process -- now takes, on average, 18 months to two years, up from 15 months a year ago, according to Amherst Securities Group LP. Backlogs in county courts and at servicing companies, along with local government moratoriums, have contributed to the delays. But plenty of signs indicate that the mortgage companies themselves are in no hurry to seize their collateral.

    Rick Sharga, a senior vice president at RealtyTrac Inc., an Irvine, Calif., company that monitors foreclosure filings, said banks often start proceedings but then decide "they don't want the property" and suspend the process indefinitely.

    Of the 2.3 million homes that received foreclosure notices last year, one-third had been repossessed by yearend, according to RealtyTrac.

    Banks also "are allowing borrowers to be delinquent for longer and longer periods of time before initiating foreclosures," Sharga said.

    Tom Booker, a senior vice president in the default information unit at First American Corp. in Santa Ana, Calif., concurred. "There are borrowers who are six or eight months in default; they may have exhausted their workout options; but they're put on a forbearance plan because it's an interim to a final resolution, which is foreclosure," he said. "Banks don't want to take the losses now."

    … How banks account for delinquent mortgages is the subject of ongoing debate among regulators, bankers and auditors.

    Darrell Duffie, a finance professor at Stanford University's Graduate School of Business, said accounting rules give banks plenty of leeway to determine when to take losses.

    "Banks are believed to be carrying a lot of loans at accounting levels well above their true market value," he said. "But once a property goes into foreclosure, their options have disappeared."

    Timothy Ward, the deputy director of the Office of Thrift Supervision, went so far as to send a letter to chief executives in May reminding them that banks must account for losses when a loan is 180 days or more past due.

    Charging off loans "only at foreclosure or when deemed uncollectible" is considered "weak" and not in accord with generally accepted accounting principles, Ward reminded bankers.

    "This is the challenge the big banks have," said Fred Cannon, the co-director of research and chief equity strategist at KBW Inc.'s Keefe, Bruyette & Woods Inc. in New York. "They're supposed to take the loss at 180 days, but the initial chargeoffs aren't that much and then we're seeing big REO losses" (when a loan has been reclassified as "real estate owned").

    Robert Simpson, the founder and president of Investors Mortgage Asset Recovery Co. LLC, an audit and fraud analysis firm in Irvine, said bankers have little incentive to realize probable losses until forced to do so.

    "No one is encouraging banks to quickly book $75 million in losses and then take the heat for it, since they wouldn't have a job for very long," he said.

    Standard & Poor's Corp. said Tuesday that its S&P/Case-Shiller index of national home prices rose 2.9% in the second quarter from the first. It was the first sequential rise in the index in three years. Compared to a year earlier, the gauge dropped 14.9% — a slower year-over-year decline than in the first quarter.

    But in a note to clients, economists at Morgan Stanley wrote, "we do not believe that prices are actually improving for any part of the housing market, except possibly certain foreclosure markets due to a shortage of foreclosed inventory from the recent drop-off in liquidations. … This drop-off has nothing to do with fewer people becoming delinquent. … Instead, it has to do with banks and servicers reducing the rate at which they take back the properties."

    Data released last week by the Mortgage Bankers Association showed delinquent loans growing at a brisk pace. In the second quarter, roughly 4.2 million borrowers were 90 days or more delinquent on their mortgages (a delinquency rate of 9.24%, up from 6.41% a year earlier), the trade group said. By contrast, foreclosures were initiated on just 612,000 homes (a foreclosure start rate of 1.36%, up from 1.08% a year earlier).

    … Though deferring foreclosures may help bridge a period of depressed revenues, losses still must be tallied eventually, said Cannon of Keefe Bruyette.

    "One of the oldest lines in banking is 'the first loss is the best loss,'" he said. "That's what most lenders believe, but the question is, are they abiding by their own rule?"

    Bill Garland, a senior vice president at Fiserv Home Retention Solutions, a unit of Fiserv Inc. in Brookfield, Wis., said many large banks have cut back on loan-loss reserves because they now see a rebound in housing prices, a move he called possibly shortsighted. "People want to believe we're at the bottom, even though there's still a lot of REO inventory coming our way," he said.

    You can read the full article here.

    The piper is yet to be paid in full for the excesses of the recent past, and putting it off won’t make the problems go away.

    Ben Bernanke - The man behind the curtain


     
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Comments (6)
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  • Mayascribe
    , contributor
    Comments (9598) | Send Message
     
    Another fine article, James. Reality will set in, sooner or later.
    1 Sep 2009, 12:51 PM Reply Like
  • John Lounsbury
    , contributor
    Comments (3970) | Send Message
     
    Jim - - -

     

    I'm not even sure we're in Oz. Limbo, anyone?
    1 Sep 2009, 12:55 PM Reply Like
  • Right Blend Investing, LLC
    , contributor
    Comments (583) | Send Message
     
    The foreclosure overhang is NOT reflected in bank stocks. The bottoming process will continue for a long time, and any other assumption is pure optimism (aka mindless optimism).
    1 Sep 2009, 01:08 PM Reply Like
  • optionsgirl
    , contributor
    Comments (5045) | Send Message
     
    I can attest first hand that the banks often ignore offers to purchase short sales. I have several offers in to purchase properties, and the lenders seem to be ignoring the offers.

     

    However, I disagree with this part, Jim: "They will funnel billions more of your money to the zombie banks, so moronic deadbeats can still stay in houses without paying".

     

    How can you characterize those people as moronic deadbeats? You know better. You know that unemployment is at 16% ( despite the official numbers), that these loans were made because of the federal govt, and that only 1% is subprime/ Alt-A.

     

    Your assertion that those people are moronic deadbeats is sanctimonious.
    1 Sep 2009, 01:24 PM Reply Like
  • Zmartmoney
    , contributor
    Comments (1155) | Send Message
     
    I can concur with your assessment that banks are ignoring short sales. It just took me a bit to figure out why. "Moronic deadbeats" may be a bit harsh, but if you knew how many people had the capability to make their payments...but are NOT making their payments, in order to bail out of something that has lost market value, and to save up for when they have to go out and do something else, then you might reduce the charity level of your chosen description of that behavior, as the author has done. Buying into any investment and then deciding it was a bad choice on your part and sticking the lender with the fallout from your bad decision could certainly fall under the heading of "deadbeat." And believe me, there is plenty of that going on. After all, that's what the "banks" like GS intend to do to us before it's over. It worked the last time, didn't it? To borrow a phrase from JFK - we're buying at retail, selling at wholesale, and paying the freight both ways.

     

    On Sep 01 01:24 PM optionsgirl wrote:

     

    > I can attest first hand that the banks often ignore offers to purchase
    > short sales. I have several offers in to purchase properties, and
    > the lenders seem to be ignoring the offers.
    >
    > However, I disagree with this part, Jim: "They will funnel billions
    > more of your money to the zombie banks, so moronic deadbeats can
    > still stay in houses without paying".
    >
    > How can you characterize those people as moronic deadbeats? You know
    > better. You know that unemployment is at 16% ( despite the official
    > numbers), that these loans were made because of the federal govt,
    > and that only 1% is subprime/ Alt-A.
    >
    > Your assertion that those people are moronic deadbeats is sanctimonious.
    1 Sep 2009, 01:37 PM Reply Like
  • Mark Bern, CFA
    , contributor
    Comments (4769) | Send Message
     
    Good comment from OG and overall a good article. While the author's characterization may have been a little heartless, the point still remains that the US taxpayer is likely going to fork over a few hundred Billion more to the banks when the make-up is washed off of these pigs, otherwise know as big banks.

     

    There are many minefields left for banks to maneuver through and I don't think that they are nimble enough to miss all the trip wires. FASB has a few more hurdles for them coming out early 2010 and I doubt whether many of the banks in the worst shape (i.e., C, WF, BoA) will wriggle through unscathed.

     

    Eventually, the banks will be forced to own up to their losses unless the Administration can pressure the Big 4 accounting firms to lie. I suspect that there will be some deals made to allow the binge banks to take write-downs systematically over a period of a couple of years so as to not put them out of business all at once. But the red ink should begin to flow again next spring when they start recognizing the losses that are being blatantly delayed beyond all accounting rules and regulations. But next spring will only be the beginning.
    1 Sep 2009, 01:40 PM Reply Like
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