How do Bank’s account for delinquent loans?

[evolusd]

When discussing the number of delinquent borrowers and the average time it takes for Banks to foreclose (400+ days), I hear people say ‘the Banks don’t want to foreclose because they don’t want to have to recognize the loss.’

Based on my basic understanding of accounting and banking, this doesn’t make sense. As a Borrower becomes delinquent, the Bank has to incur a P&L expense to reserve for losses on that loan. My guess is they estimate the market value of the real property collateral and reserve accordingly under the assumption they will eventually foreclose and sell the property. If they eventually foreclose and sell at their estimated value, then it’s a 0 sum game post-close b/c they’ve already incurred the loss in the form of the increased reserve. Is the above correct, or is there some FASB rule that allows them to keep non-performing loans at par?

What’s the incentive to lag so long on the foreclosure process? Is it simply a conscience contol of supply? Keeping homes trickling out as to not increase supply and accelerate the decline in prices?

evolusd

[briansd1]

mark-to-market rules have been eased.

http://www.bizjournals.com/phoenix/stories/2008/09/29/daily31.html

http://money.cnn.com/2009/04/02/news/fair.value.fortune/index.htm

[briansd1]

mark-to-market rules have been eased.

http://www.bizjournals.com/phoenix/stories/2008/09/29/daily31.html

http://money.cnn.com/2009/04/02/news/fair.value.fortune/index.htm

[briansd1]

mark-to-market rules have been eased.

http://www.bizjournals.com/phoenix/stories/2008/09/29/daily31.html

http://money.cnn.com/2009/04/02/news/fair.value.fortune/index.htm

[briansd1]

mark-to-market rules have been eased.

http://www.bizjournals.com/phoenix/stories/2008/09/29/daily31.html

http://money.cnn.com/2009/04/02/news/fair.value.fortune/index.htm

[briansd1]

mark-to-market rules have been eased.

http://www.bizjournals.com/phoenix/stories/2008/09/29/daily31.html

http://money.cnn.com/2009/04/02/news/fair.value.fortune/index.htm

[evolusd]

Quote:

“The new FASB rules could help boost banks’ earnings by making it clear that institutions can account for mortgage-backed securities and other assets based on their internal estimates of cash flow and other factors, rather than relying on sales prices in largely inactive markets.”

This seems to address accounting for MBS – I’m inquiring about the loans that Banks hold directly in their portfolio. When a Borrower stops paying, the Bank has to address that change in some way on their balance sheet, typically through an increased reserve. They can’t PV the income stream because there isn’t one anymore, so you’d think they’d have to take into consideration their collateral value and reserve accordingly.

[evolusd]

Quote:

“The new FASB rules could help boost banks’ earnings by making it clear that institutions can account for mortgage-backed securities and other assets based on their internal estimates of cash flow and other factors, rather than relying on sales prices in largely inactive markets.”

This seems to address accounting for MBS – I’m inquiring about the loans that Banks hold directly in their portfolio. When a Borrower stops paying, the Bank has to address that change in some way on their balance sheet, typically through an increased reserve. They can’t PV the income stream because there isn’t one anymore, so you’d think they’d have to take into consideration their collateral value and reserve accordingly.

[evolusd]

Quote:

“The new FASB rules could help boost banks’ earnings by making it clear that institutions can account for mortgage-backed securities and other assets based on their internal estimates of cash flow and other factors, rather than relying on sales prices in largely inactive markets.”

This seems to address accounting for MBS – I’m inquiring about the loans that Banks hold directly in their portfolio. When a Borrower stops paying, the Bank has to address that change in some way on their balance sheet, typically through an increased reserve. They can’t PV the income stream because there isn’t one anymore, so you’d think they’d have to take into consideration their collateral value and reserve accordingly.

[evolusd]

Quote:

“The new FASB rules could help boost banks’ earnings by making it clear that institutions can account for mortgage-backed securities and other assets based on their internal estimates of cash flow and other factors, rather than relying on sales prices in largely inactive markets.”

This seems to address accounting for MBS – I’m inquiring about the loans that Banks hold directly in their portfolio. When a Borrower stops paying, the Bank has to address that change in some way on their balance sheet, typically through an increased reserve. They can’t PV the income stream because there isn’t one anymore, so you’d think they’d have to take into consideration their collateral value and reserve accordingly.

[evolusd]

Quote:

“The new FASB rules could help boost banks’ earnings by making it clear that institutions can account for mortgage-backed securities and other assets based on their internal estimates of cash flow and other factors, rather than relying on sales prices in largely inactive markets.”

This seems to address accounting for MBS – I’m inquiring about the loans that Banks hold directly in their portfolio. When a Borrower stops paying, the Bank has to address that change in some way on their balance sheet, typically through an increased reserve. They can’t PV the income stream because there isn’t one anymore, so you’d think they’d have to take into consideration their collateral value and reserve accordingly.

[SK in CV]

The incentive to hold off so long on foreclosures theoretically has nothing to do with recognizing losses. Losses must be recognized when there is evidence of impairment. Though possibly sooner, such impairment must be evaluated if a loan is 90 days delinquent. Whether loans have to be individually evaluated depends on the relationship between the size of the loan and the size of the bank. Giant banks may not be required to individually evaluate most home mortgages. Smaller banks probably will. The larger banks can evaluate similar assets as a whole. But whether those loans must be evaluated individually or as a group, they must be re-evaluated at every balance sheet date, and appropriate loan loss reserves must be made. Foreclosure should finalized the loan loss evaluation process, because at foreclosure the impaired asset changes from a loan to REO. The REO must also be evaluated at each balance sheet date, and any additional impairment must be recognized. (It just changes from a loan loss to an REO loss.)

[SK in CV]

The incentive to hold off so long on foreclosures theoretically has nothing to do with recognizing losses. Losses must be recognized when there is evidence of impairment. Though possibly sooner, such impairment must be evaluated if a loan is 90 days delinquent. Whether loans have to be individually evaluated depends on the relationship between the size of the loan and the size of the bank. Giant banks may not be required to individually evaluate most home mortgages. Smaller banks probably will. The larger banks can evaluate similar assets as a whole. But whether those loans must be evaluated individually or as a group, they must be re-evaluated at every balance sheet date, and appropriate loan loss reserves must be made. Foreclosure should finalized the loan loss evaluation process, because at foreclosure the impaired asset changes from a loan to REO. The REO must also be evaluated at each balance sheet date, and any additional impairment must be recognized. (It just changes from a loan loss to an REO loss.)

[SK in CV]

The incentive to hold off so long on foreclosures theoretically has nothing to do with recognizing losses. Losses must be recognized when there is evidence of impairment. Though possibly sooner, such impairment must be evaluated if a loan is 90 days delinquent. Whether loans have to be individually evaluated depends on the relationship between the size of the loan and the size of the bank. Giant banks may not be required to individually evaluate most home mortgages. Smaller banks probably will. The larger banks can evaluate similar assets as a whole. But whether those loans must be evaluated individually or as a group, they must be re-evaluated at every balance sheet date, and appropriate loan loss reserves must be made. Foreclosure should finalized the loan loss evaluation process, because at foreclosure the impaired asset changes from a loan to REO. The REO must also be evaluated at each balance sheet date, and any additional impairment must be recognized. (It just changes from a loan loss to an REO loss.)

[SK in CV]

The incentive to hold off so long on foreclosures theoretically has nothing to do with recognizing losses. Losses must be recognized when there is evidence of impairment. Though possibly sooner, such impairment must be evaluated if a loan is 90 days delinquent. Whether loans have to be individually evaluated depends on the relationship between the size of the loan and the size of the bank. Giant banks may not be required to individually evaluate most home mortgages. Smaller banks probably will. The larger banks can evaluate similar assets as a whole. But whether those loans must be evaluated individually or as a group, they must be re-evaluated at every balance sheet date, and appropriate loan loss reserves must be made. Foreclosure should finalized the loan loss evaluation process, because at foreclosure the impaired asset changes from a loan to REO. The REO must also be evaluated at each balance sheet date, and any additional impairment must be recognized. (It just changes from a loan loss to an REO loss.)

[Author]

Posts