I have often written about the fraud in marking so-called "assets" to mythical values. But nowhere does the damage of this practice hit more home than it does in places like this:
Vacant homes can become havens for drug sales and other crimes. Health and sanitation is another issue when homeless people move in to properties where utilities have been disconnected. And as the weather cools, there is yet another worry -- fires started by intruders trying to keep warm in vacant homes.
"They want to find a place to get out of the cold," Rigler says at another home near 300 East and 800 South. Several windows and even two doors have needed boarding up in recent months to keep out those doggedly determined to take up residence.
Those homes are the "visible side" of accounting fraud.
This is not limited to Utah. In Oakland CA:
"Just about every foreclosed property on my beat has some kind of problem," said Derek Smitheram, a police officer in East Oakland, which he said has thousands of vacant homes.
Again, the issue here is that these properties are being intentionally kept back from the market due to valuation.
But the real estate agent now brings a pistol when he visits the foreclosures he is trying to sell for banks, in case he runs into squatters in the long-vacant homes.
The problem in all three places, and thousands of towns across the country, is the same: Banks have every incentive to drag their feet in both recognizing that loans are delinquent and thus to prosecute foreclosure in the first place, but also, once that has occurred, they have every incentive to hold properties off the market - the so-called "shadow inventory" - to avoid recognizing losses that have already occurred.
Dr. Housing Bubble puts a bit decent amount of focus on this, drilling down into one particular MSA and finding 465 homes in the MLS. Of those, about 160 are either short sales or foreclosures.
But there are 1639 homes that are in pre-foreclosure, bank-owned or defaulted. Take the public listings out and you have 1,477 homes thare are "missing in action" yet in fact are not owned by a stable, paying owner.
OTS, on May 22nd, acknowledged these practices and yet is doing nothing about it:
The review disclosed several practices that may not be in accordance with supervisory guidance and generally accepted accounting principles (GAAP).
Translation: Under GAAP these practices are accounting fraud.
Institutions charge-off losses only at foreclosure or when deemed uncollectible. A sound practice is to establish charge-off policies in accordance with the Uniform Retail Credit Classification and Account Management Policy (CEO Memo #128, July 27, 2000). Institutions should assess the current value of the collateral and selling costs when a loan is no more than 180 days past due. Any loan balance in excess of that assessment should be classified Loss.
Translation: Banks and Thrifts are holding loans at values that do not reflect the value of the collateral or likelihood of collection. That is, they're lying.
Institutions stated that modifications to interest rates that reflect current market rates are not troubled debt restructurings (TDRs), even when these rates are concessions granted to borrowers. However, if the borrower cannot obtain a loan at a similar rate and with similar terms with another lender, the modification is likely a TDR. Institutions should properly identify TDRs in accordance with GAAP and properly account for the TDRs. A loan modification is a TDR when a creditor grants a borrower a concession it would not otherwise consider because of economic or legal reasons pertaining to the borrowers financial difficulties.
All loans under "HAMP" (the government modification program) are TDRs. No borrower, absent distress of some sort, would get a similar extension of term or modification. Again, another lie.
Institutions place loans on nonaccrual status when deemed uncollectible and do not reverse accrued but uncollected interest through current earnings. An institutions nonaccrual policy should require that a loan be placed on nonaccrual status in a timely manner, generally when 90-days delinquent, and accrued but uncollected interest should be reversed through current earnings when it is probable that the interest will not be collected in cash from the borrower.
This is the "OptionARM" mess that I started writing the Ticker over in early 2007. Banks are not reversing their so-called "earnings" taken from accrued negative amortization. This amounted to tens if not hundreds of billions of dollars during the bubble years, yet these so-called "earnings" were FICTIONAL.
Institutions refresh or increase interest reserves on construction loans and continue to accrue interest income even when the borrower cannot make out of pocket payments and the construction project shows signs of trouble. Interest income accrual from interest reserves on construction loans should only continue when it is probable that interest will be received in cash from the borrower and collection of principal is also probable.
If you're wondering how Colonial Bank managed to book a sixty percent loss on its construction book when BB&T came in and took it over, this is how it happened. Banks are holding construction loans at or near "par", that is full value, even when there is basically no chance that these loans will ever perform and the interest and principal will never be paid.
The bottom line here folks is as I have been hollering about for over two years: Banks and other institutions are carrying paper at FAR beyond its reasonable fair-market value - or that which it will EVER realize under any reasonable set of assumptions going forward.
Bluntly, we have institutionalized accounting fraud and the so-called "regulators" that are supposed to put a stop to and even prosecute these acts are willfully and intentionally ignoring them. The cities and towns across America are the big losers where these practices cause blight through intentional neglect while these "banks" claim to be in far better financial condition than is in fact the case.
In addition, this willful disregard for the truth means that these bankrupt institutions remain in the system as "zombies", unable to perform their critical role in credit intermediation.
Virtually everyone, including our regulators, has recognized the infirmity of these practices and written about it - newspapers, bloggers like myself, and even the OTS.
Yet nothing has been done - not by The Fed, not by Congress, not by OTS and not by the FBI, even though accounting fraud is in fact a felony.
The law is not supposed to apply only to the "little people", but it is in fact the "little people" who have to suffer through the crack houses, squatters living in homes with no running water and the public health problems this creates and the damage to neighborhood values caused by boarded up and broken-into homes that are being intentionally withheld from the market as a tactic to prolong and enable financial institutions to remain operating with their executives siphoning off salary and even bonuses while they are, under GAAP, bankrupt.
Stop the looting and start prosecuting!
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