Phantom Income on Phantom Mortgages

[thunderdownunder]

This could not be happening - seriously - this could not be happening.
http://blogs.forbes.com/robertlenzne...mepagechannels
This has implications and none of them are good

[thriftyandboringinohio]

Re: Phantom Income on Phantom Mortgages

Hoo boy. I read it and see it the same way.
This could be quite a land mine ready to blow up some bank balance sheets.

[rshimada]

Re: Phantom Income on Phantom Mortgages

Great find. It does rather explain why banks are reluctant to lend. Nice of the Fed paying interest on excess reserves!

Any bets on interest on delinquent mortgages being part of bank stress tests?

[ASH]

Re: Phantom Income on Phantom Mortgages

I second thriftyandboringinohio and rshimada -- excellent find. It seems that since this accounting practice is 'official', and obviously is understood by banking analysts, there ought not to be a big surprise factor. I don't see much potential for a sudden bank capitalization crisis, since the banks can more-or-less control the rate at which they have to recognize this type of loss. It does seem to be another reason why the downward pressure on housing prices from distressed properties -- and the period of relatively tight credit -- will be strung out for a long time.

[zoog]

Re: Phantom Income on Phantom Mortgages

Hoo boy. I read it and see it the same way.
This could be quite a land mine ready to blow up some bank balance sheets.

I figure it's just a rolling circus. Each quarter as they're finally declaring the loss on the foreclosed homes, they're adding in phantom income from the next batch of homes that are in default but have not yet foreclosed.

[thriftyandboringinohio]

Re: Phantom Income on Phantom Mortgages

I now have a hazy memory about an article on this topic a couple years ago. My recollection is:

- this has always been a practice in banking, to book income due on non-performing loans

- traditionally, banks only had a small number of non-performing loans, and a high percentage of those recovered (the car was repossessed and sold or the mortgage holder found a job and caught up payments), so this practice has been a rational way to keep the books.

- the situation is substantially different today, with lots of bad mortgages and darn few of those now getting well.

Wish I could recall the original source (it could have been EJ in which case Metalman might find it!)

[lektrode]

Re: Phantom Income on Phantom Mortgages

I second thriftyandboringinohio and rshimada -- excellent find. It seems that since this accounting practice is 'official', and obviously is understood by banking analysts, there ought not to be a big surprise factor. I don't see much potential for a sudden bank capitalization crisis, since the banks can more-or-less control the rate at which they have to recognize this type of loss. It does seem to be another reason why the downward pressure on housing prices from distressed properties -- and the period of relatively tight credit -- will be strung out for a long time.

then on that same blog, was this lil jewel:
http://blogs.forbes.com/robertlenzne...lation-coming/

john paulson primin' the FIRE pump on last pgph:

It could be time to sell your low-yielding bonds and replace them with higher-yielding common stocks.
Multibillionaire hedge fund operator John Paulson, the investment genius who made a killing going short subprime mortgages a few years ago, told a standing room only crowd at New York’s University Club that double-digit inflation is about to rear its ugly head by 2012, killing the bond market, and restoring strength to equities and gold.
Paulson’s warning to sell U.S. government bonds is one of the latest signs that the most successful investors of this generation believe the run up in bonds is over. Paulson especially underscored the attraction of equities with earnings yields of 7%-8% compared to the 2.6% pittance available on 10-year Treasuries.
Paulson listed his favorite blue-chip stocks; JNJ (Johnson& Johnson) at a 3.8% yield; KO(Coca Cola);PFE, 4% yield., as well as C (Citigroup), BAC (BankofAmerica) and STI (Suntrust Banks) and RF (Regions Financial).
Paulson is a pro at buying the distressed bonds of bankrupt companies, and then converting the debt to equity in reorganization and benefiting from the potential run up. He mentioned one of his greatest plays — K-Mart, which emerged from bankruptcy at $10 a share and then skyrocketed to $190 a share.
His crystal ball is for 2% GDP growth for 2011 and 2012 and he warns that the Fed’s promise of quantitative easing should contribute to double-digit inflation over the next few years.
As this is the best time in 50 years to buy homes, Paulson advised his listeners, crowded into 3 separate dining rooms, to issue 30 year mortgages to buy a home as “your debt and interest payments get locked in at record lows, while the price of your home will rise.”
“If you don’t own a home buy one,” Paulson recommended; ” if you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

[thriftyandboringinohio]

Re: Phantom Income on Phantom Mortgages

...Multibillionaire hedge fund operator John Paulson, the investment genius who made a killing going short subprime mortgages a few years ago,... this is the best time in 50 years to buy homes, Paulson advised ....“your debt and interest payments get locked in at record lows, while the price of your home will rise.”
“If you don’t own a home buy one,” Paulson recommended; ” if you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

Thanks lektrode. Always good to hear contrary advise from a credible source.

[c1ue]

Re: Phantom Income on Phantom Mortgages

Yes, I was about to post this article as well.

It makes perfect sense: if banks can lie about the cash value of their crap mortgages, why not lie about the income they receive from them?

So long as they keep getting cash from the Fed - no worries about not actually making any of their own.

Of course we can all see the consequences of this: so long as banks are officially making money on nonexistent assets and booking nonexistent interest gains, the last thing they can do is lend actual money out and take on more risk.

At some point the cash spending plus recognition of booked losses will overwhelm all but the most egregious Fed and bank fee income.

Similarly the US economy and Fed are now locked into ZIRP...until external factors force an interest rate increase.

Bond vigilantes be damned, it will be as iTulip says: commodity price increases due to dollar devaluation feeding into wage price spiral.

Then all hell breaks loose.

While EJ/iTulip might still say no hyperinflation - at the same time how does a dollar falling 50% in 3 months figure? Merely very high inflation?

Think $3 gasoline going to $6 in 3 months.