SK in CV makes relevant points, but alas, the devil is in the details. Yes, theoretically banks build up specific reserves (via provisioning) on delinquent loans as these loans move through the credit quality “buckets” (pass>watch list>substandard>doubtful>loss), but… some banks play games with both the appraisals and the required reserves. Regulators provide “guidelines” on these issues but there are no hard and fast rules. So, games can be played because banks have some discretion where these issues are concerned. It is much more difficult to play these games today, however, than it was in 2008, for instance, because both the auditors and regulators (both imperfect) are much less tolerant today than they were a few years ago.[/quote]
That’s why I cheated and said theoretically 🙂
But the question was whether the valuation and loan loss provisions are the reason that banks hold off on foreclosures. And the general rules I outlined are applied pretty stringently to banks. I should have answered the right question, instead of the wrong one. It was the wrong question because most loans aren’t owned by banks. And while the accounting rules are generally the same (If i remember correctly it’s FASBs 114 and 104 and 105, but I could be wrong on all of those.), the entities (mostly REMICS, except for the GSE’s), aren’t subject to the same regulatory guidelines and oversight that banks are. So as Yogi Berra said, in theory, there’s no difference between practice and theory, but in practice, there is.
