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View Diary: Banks Reporting Phantom Income on $1.4T Delinquent Mortgages (29 comments)

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  •  yes, (2+ / 0-)
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    Geekesque, dark daze

    They have to increase capital reserves each time a loan goes into the non-performing category (ie, payments have ended).  Which is why there is some extend and pretend behavior where the borrower continues to pay interest so the loan isn't technically non-performing, but the Reserves rules are tightening and in many audit situations at the banks, loan officers are being told to put loans onto fully amortizing basis or foreclose.

      Its ugly in the banking/commercial borrower community right now around here.  Smaller banks haven't gotten the Fed money the big banks got, and the loan market has dried up for smaller investors regardless of their credit history and the cash flow of their investments. Rates for many quality borrowers are doubling if they can get the money at all.  Frequently a property that was cash flowing at 4 percent doesn't cash flow at 6 1/2%, putting even more loans in default.  People with lots of equity are ok, but their net income has been greatly reduced.

    The super rich with cash reserves are making a killing.

    •  Citigroup was found to have an 80% defect rate (1+ / 0-)
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      on loans sold in 2007.  

      Last April, a former top underwriter in Citigroup's consumer lending division, Richard Bowen, testified before the Financial Crisis Inquiry Commission about the mortgages that Citigroup had been buying from third parties and selling to Freddie Mac, Fannie Mae and other investors before its 2008 taxpayer rescue. Bowen said he discovered in mid-2006 that more than 60 percent of the mortgages purchased and resold by Citigroup were defective. By 2007, he said, that rate had increased to more than 80 percent.

      Do they have enough reserves to cover mortgage putbacks?

      Hope. It is the quintessential human delusion, simultaneously the source of your greatest strength, and your greatest weakness.

      by The Anomaly on Wed Jan 26, 2011 at 11:36:05 AM PST

      [ Parent ]

      •  we'll be seeing (0+ / 0-)

        what happens, the non-performing loans are different than the 'defective' loans.

        The vast majority of defects are minor and curable (or even irrelevant) from the point of view of collecting against a borrower.  A loan closing package can have two dozen documents, an error on any of them can be a 'defect', but few affect enforceability, in many cases if assignments weren't done timely, they can be done later and be legally effective, you just can't foreclose until you do the corrective work.

        The investors, based on their contracts, have rights to certain things that aren't based in the state property law that determines enforceability of the note/mortgage, and that presents a larger problem.  If there were deadlines set for all paperwork to be done or turned over to the investor, even though it can be done later, as a matter of contract law, the bank may be out of luck because it missed the deadline.  Until individual contract terms are litigated, no one can know what the losses are likely to look like.  'Substantial complaince' rules in some circumstances may save the banks, some states may have strict compliance standards, etc. and the banks lose. In the same contract, some terms may be subject to strict compliance, others may not.  In terms of damages, many times you don't get 100% damages, you get what you lose, if the bank can collect on the loan, there may be no loss.  If there is one of the 'put back' clauses that have been talked about where the bank has to rebuy the security, it may still not be a total loss, they may get a credit for amounts paid out in income if they do buyback, I haven't seen the language of any of the putbacks, and the courts may deem it a windfall to let the security holder to claim the purchase price and keep its earnings too, and the bank even if it has to buy back the security, may still be able to collect on the loan and offset that income against the loss.

        BOA was sued by a group of investors Monday, we'll see how that goes and what kinds of losses are possible.  The big guns are also settling as they can with Freddie and Fannie, investors in lots of that paper, and the first of the settlements was pretty favorable to the banks.  The private or sovereign wealth fund investors may not be as easy to deal with.  

        But those losses are outside your typical loan reserve losses for a non-performing loan.   That's one reason the banks have soaked up a lot of cash from fed but haven't been lending.   Rainy day money.

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