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On 7 million homes in the process of foreclosure, banks are reporting the accrued interest as income even though it will not be collected.  Robert Lenzner has the story at Forbes:

All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a resullt, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed.

Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans, suggests Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.

Mortgage servicers have come under increasing stress as their house of cards has collapsed.  Courts are now refusing to allow an easy escape from the sliced and diced securitization web that financiers have tied themselves in.  Up to 62 million homes have clouded titles, making foreclosures a dicey proposition.

Like Wile E. Coyote hovering off the cliff, the only thing preventing banks from falling into the abyss is the failure to account for their situation.

The fraudulent CEOs looted with impunity, were left in power, and were granted their fondest wish when Congress, at the behest of the Chamber of Commerce, Chairman Bernanke, and the bankers' trade associations, successfully extorted the professional Financial Accounting Standards Board (FASB) to turn the accounting rules into a farce. The FASB's new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional "income" and "capital" at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks.

Last year, financial firms were caught masking debt prior to quarterly public reports.

Three big banks—Bank of America Corp., Deutsche Bank AG and Citigroup Inc.—are among the most active at temporarily shedding debt just before reporting their finances to the public, a Wall Street Journal analysis shows.

...Over the past 10 quarters, the three banks have lowered their net borrowings in the "repurchase," or repo, market by an average of 41% at the ends of the quarters, compared with their average net repo borrowings for the entire quarter, according to an analysis of Federal Reserve data. Once a new quarter begins, they boost those levels.

...Intentionally masking debt to deceive investors violates Securities and Exchange Commission guidelines. Before sliding into bankruptcy in 2008, Lehman Brothers Holdings Inc. reduced its reported quarter-end borrowing by classifying repo loans as sales, a bankruptcy examiner found—creating what the examiner said was a "materially misleading" picture of Lehman's financial condition.

With nearly half of all mortgages estimated to be underwater, some properties have become so worthless that even the banks are walking away from them.

Without an economic incentive to foreclose, it would not be in the bank shareholders best interests to pursue foreclosure even though borrowers clearly defaulted & owe money to the lender. The economics of distressed assets in mortgage and commercial banking are quickly changing.

Originally posted to The Anomaly on Wed Jan 26, 2011 at 08:55 AM PST.

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