[quote=gdcox] This accords. What we need is a banking expert to advise when a foreclosed property has to be marked down. If it is only when it is sold and in the meantime it is valued at the valuation at time of mortgage issue, these games would be explainable.[/quote]
I sit on a couple of bank boards so I’ll field this one…
Once a loan gets classified as “doubtful” – which in the case of a SFR loan is when payments are more than 90 days past due – the lender generally has to put up a reserve equivalent to 50% of the loan’s outstanding balance. Once the property is foreclosed upon, it becomes “Other Real Estate Owned” (OREO) and if there is a negative difference between the previous reserve (at 50% of the outstanding loan balance) and the expected recovery, then an additional provision is taken to get the reserve up to where the lender “thinks” there will be no additional loss. Yes, lenders can play around with these numbers a little bit, but not nearly as much as the original poster suggests, particularly in the case of SFRs, which are pretty straightforward as far as loans go. Regulators do a reasonably good job of making sure that proper reserves are taken under a given set of circumstances, even though they don’t do a good job of regulating the quality of a lender’s original underwriting (as we’re seeing).
I have a feeling that the “shadow inventory” arising from lenders is not about deferring charge-offs but rather about lack of manpower to handle the massive overload of OREO.
