How do Bank’s account for delinquent loans?

[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.)

[davelj]

There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[davelj]

There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[davelj]

There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[davelj]

There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[davelj]

There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[SK in CV]

[quote=davelj]There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[SK in CV]

[quote=davelj]There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[SK in CV]

[quote=davelj]There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[SK in CV]

[quote=davelj]There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[SK in CV]

[quote=davelj]There is a previous discussion on this topic here:

http://piggington.com/meredith_whitney_quote_data_point

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.

[evolusd]

I guess I’m used to the commercial banking world where we portfolio loans and are requird to maintain appropriate risk grades based on the current financial condition of the borrower. I see what you’re saying – such a large % of home mortgage loans have been bundled and sold as MBS, the large banks really hold more MBS, which is reserved for differently as a group rather than individually.

Thanks for the clarification, guys.

[evolusd]

I guess I’m used to the commercial banking world where we portfolio loans and are requird to maintain appropriate risk grades based on the current financial condition of the borrower. I see what you’re saying – such a large % of home mortgage loans have been bundled and sold as MBS, the large banks really hold more MBS, which is reserved for differently as a group rather than individually.

Thanks for the clarification, guys.

[evolusd]

I guess I’m used to the commercial banking world where we portfolio loans and are requird to maintain appropriate risk grades based on the current financial condition of the borrower. I see what you’re saying – such a large % of home mortgage loans have been bundled and sold as MBS, the large banks really hold more MBS, which is reserved for differently as a group rather than individually.

Thanks for the clarification, guys.

[evolusd]

I guess I’m used to the commercial banking world where we portfolio loans and are requird to maintain appropriate risk grades based on the current financial condition of the borrower. I see what you’re saying – such a large % of home mortgage loans have been bundled and sold as MBS, the large banks really hold more MBS, which is reserved for differently as a group rather than individually.

Thanks for the clarification, guys.

[Author]

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