US Banks Reporting Phantom Income on $1.4 Trillion Delinquent Mortgages

http://blogs.forbes.com/robertlenzner/2011/01/12/us-banks-reporting-phantom-income-on-1-4-trillion-delinquent-mortgages/?boxes=Homepagechannels
Jan. 12 2011 - 8:36 am | 4,676 views | 0 recommendations | 14 comments
US Banks Reporting Phantom Income on $1.4 Trillion Delinquent Mortgages
The giant US banks have been bailed out again from huge potential  
writeoffs by loosey-goosey accounting accepted by the accounting  
profession and the regulators.

They are allowed to accrue interest on non-performing mortgages ”  
until the actual foreclosure takes place, which on average takes about  
16 months.

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 gthe 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.

The potential writeoffs could be even larger should home prices  
continue to weaken, placing more homes in the nomnperforming category  
on bank balance sheets.

About 6 million homes are still at risk, according to Schnapp, and at  
least 10% of them are 25% underwater, meaning their market value is  
25% less than the mortgage– but the owners are still paying interest  
to their banks.

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