I agree that some of these lenders appear to be clinging to the forlorn hope that the market will recover and minimize their losses. They have that hope because of some of the bull economists. Unfortunately for the lenders, this is one time when running the clock is going to backfie on them.

A lender resells money. It buys the money from depositors or investors at one rate and resells it to the borrowers at a higher rate, the difference between the two (and the additional fees they charge the borrower) being the margin off of which they operate.

For a portfolio lender, if they are sitting on a non-performing loan their holding costs include their payments to their depositors. For a secondary market investor who is holding the paper they are losing their returns, and once the asset gets resold at the loss they are losing their principal.

Besides all that, banking and accounting regulations require the lender to write those non-performing assets up as losses after a relatively short time. This triggers requirements to set aside larger reserves to cover these losses. In essence, it’s equivalent to the margin call because it reduces the leverage they normally use to operate with. The bottom line on all this is that once they take a property back the clock is ticking. Some of them appear to be gaming the system by not charging these losses off in a timely manner but sooner or later those books will have to balance out.

That’s why I think of the “slow bleed” for these lenders in terms of their annual reports. They can play games on their quarterlies, but come their year’s end they have to restate everything.