I put a post here the other day about staging a house and then saying I’d put in photos of the finished product to get responses from readers here (preferably readers and not regular contributors) about whether or not they could see the value and difference staging (and good preparation) makes in a sale. This listing got multiple offers and has a contract on it for more than asking price right now which was somewhat expected since we priced the home in the mid-range of what it could sell for based on our market analysis for the area.
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Comments? I have not posted every single photo but this gives a good layout of the house and most of the amenities it has to offer.
Congratulations Rhonda! I think your 2 1/2 hours a day of blogging etc. is working out to be a good investment of your time. You are providing some clarity about mortgages and the industry, nice counterpoint to some of the Ads people see on TV, and hear on the Radio.
Thanks, Deborah. I can’t believe I’ve only been blogging since November! I really enjoying blogging…the only real downside is that I’m burning dinner (I never did that before). Oh well!
Congrat! I think it is great that you have earned enough interest and credit to be seen in the eyes of mainstream media as a resource. Keep up the Great Work and Awesome Topics!
Nice work, Rhonda!
You and Dane were “representin’ the Ten-O-Three” well !
If a bank writes a mortgage for $500K, and it goes out at 3% neg-am, with an APR of 8%.
Joe Six Pack sends in his $1250 per month. The bank books the full amort amount (say $4250 just for discussion sake). So, the bank tells its shareholders it received $3000/mo more than it really has. Who has that $3K? J6P has that money, and he just spent it on a plasma TV at Best Buy.
Now we have both the bank and the electronics retailer claiming they booked that extra $3K.
Who is right? The retailer.
Now, this assumes that J6P actually pays his mortgage, and our banker gets the money he says he already has. GOOD LUCK WITH THAT!
22% of subprime mortgages are delinquent by better than 30 days. GULP.
Add into this, that many institutions that bought subprime mortgages purchased them so they can collect the massive prepayment fees or higher interest rates. Uh oh…you can’t charge a prepayment if you change their payment.
That’s 10s of billions in mortgages that will have to be eaten. That’s assuming they don’t default. Again, good luck with that.
What idiot decided thta a bank’s business model should change from lending money to credible people that will give it back, to giving money to any stiff that walks through your door, just so you can collect the fees? Honestly, did all the airline execs become bankers?
The subprime contagion is the bird flu of finance. It will not be contained.
Hi Eleua,
As usual, you have me intrigued:
[So, the bank tells its shareholders it received $3000/mo more than it really has.]
I would honestly, absolutely love to read more about this. Do you have a link?
Happy Sunday,
Jillayne
“Joe Six Pack sends in his $1250 per month. The bank books the full amort amount”
WHOA! That’s a no no. Banks can’t book receivables not recieved. The OTS will be all up in their bidness if they do that. That’s a financial accounting no-no.
The bank books the full amount because they are allowed to account for this as a normal 30y mortgage. The object is to even out the cash flow on the balance sheet. The bank would not be able to book the actual cash later in the loan if it came in higher than the amort amount.
If you have any authoratative source that says the bank can not do this, please let me know. This has been this way for some time. I have not encountered a source that says otherwise.
I’m not trying to pick a fight, just trying to see what people in the biz might know about this practice.
You are right. It should be a no-no. Banks have an entire arsenal of creative accounting to make things look better than they are.
Tech companies like to treat option expenses as compensation for accounting so they can write down their taxes, but they don’t want to show it as a liability as far as their balance sheet goes. That way, they can tell shareholders they have a more solvent, higher earning company than they do. They spend a lot of money lobbying congress to keep the double standard of options accounting alive and well.
It is no surprise that banks would also be able to use some cute accounting to smooth over the jerky nature of exotic lending. It’s not as if they are PERMANENTLY doctoring the books (they will balance it in the “out years” of the loan). However, if this is true, they are painting a very rosy picture of the current state of their bank. Shareholders would not be able to see the risk the bank is taking.
If wisdom reigned supreme in the banking industry, they would never have originated subprime loans.
Anyone with a three digit IQ could see that the subprime lending practices were going to end in a bitter river of tears. 22% are currently behind by 30 days or more, and the adjustment period of ARMs has just begun. We still have 3 more years to go.
Eleua, where should I look for the info you are working concerning the sub prime mess?
bob
Deferred rent.
1st yr: 20K
2nd yr: 22K
3rd yr: 24K
4th yr: 26K
5th yr: 28K
Total rent over 5 yrs: 120K
avg rent/yr: 24K
SEC allows for you to claim 24K rent per year, and allow credits to build on the PnL, while you are only paying 20K. As the out years approach, those credits are burned up. After 5 years, the books balance.
If banks are doing something fundamentally similar, they would be doing exactly what I suggested. It’s not sinister, just using creative accounting to smooth out the cash streams. In theory, the “out years” in those exotic loans would balance, and all would be well. The bank would be receiving money it couldn’t book, thus balancing the years where it was booking money it didn’t receive.
The problem comes from an exec “banking” (no pun intended) on this to make the short term look rosier than it is. In fact, the zanier the loan, the better he could look. The out years are another exec’s problem. The current team of execs are living the good life off of shareholder money in retirement.
What happens if there are no “out years?” That’s the $60B question. If those loans evaporate, the banks take a double-whammy. They lose the out years, and they have to restate the early years.
That’s my point. Desparation in banking could bring down the entire RE ecosystem, and many other fields. In fact, a widespread banking panic (caused by crappy real estate loans) could cause a worldwide financial meltdown.
That’s my point.
That’s why it is dangerous for 300 million people to attempt to speculate their way to prosperity.
There is more to the housing bubble than some angry renters that believe they missed the train.
Bob,
I don’t understand your question.
Are you asking what would be an authoratative source for this type of banking accounting?
or
Are you asking what closets I am looking through in the bigger PRIME banks for skeletons that might make for an epic short selling opportunity?
For question A, I would imagine that someone fairly senior in a bank’s accounting dept would know. The accountant that is a direct report to the CFO or controller would probably know. A few of these would paint a fairly accurate picture of what the accounting standards are.
For question B, I am looking squarely at the subprime book for many of the larger banks. How many? How many delinquent? What terms? Can they collect all the fees? What is the default rate? How many were wrapped and sold to the credit markets? How many have been ‘returned to sender?’ How thinly are they capitalized? Who is the bagholder on these loans? Do they have a big stake in credit default insurance? Who guarantees that? How are they capitalized? What percentage were neg-am? I-O? ARM? How much BBB stuff is there? How vulnerable is the A stuff? AA? How many loans are 2nds and 3rds?
You get the picture.
The bigger banks might very well be the ENRON of tomorrow.
How would you like to have shorted ENE at the top?
I doubt the subprime lenders are the only grenade rolling around on the floor of the REIC.
Jillayne,
The only link I have is to a paid subscription site, so no link available.
This should be easy enough to find out, once we know what questions to ask and to whom we ask them.
Check in on my site from time to time. As I find out about this, I’ll post up a storm. Should this be true, I will probably move the economic alert status to CRASH-CON 2. We already have examples of the REIC getting violent. MarinBubble (one of the better bubble blogs out there) got death threats.
My expertise in this matter is very flimsy. I am attempting to fill the holes by fishing in areas that might have better info. RCG has many RE professionals, and one of them might have insight.
Brian’s objections (post #8) have been noted. I’m for someone that has a more intimate knowledge than Brian. No offense intended for Brian.
H Eleua,
I might have an authoritive source for you. Will get back to you tomorrow.
Jillayne
A google search turned up this article on Salon:
http://www.salon.com/tech/htww/2006/09/01/option_arms/index.html
Not exactly authoritative, but sometimes plain language is best:
———-
“The key point: while borrowers can make minimum payments that don’t even cover the amount of interest accruing on the loan, thus resulting in their unpaid balance rising each month instead of declining, lenders are legally allowed to book as revenue the maxinum payment, that is, the payment borrowers would need to make if they wanted to pay off the full amount a standard mortgage would require.
“According to generally accepted accounting principles, or GAAP,” says Businessweek, “banks can count as revenue the highest amount of an option ARM payment — the so-called fully amortized amount — even when borrowers make only the minimum payment. In other words, banks can claim future revenue now, inflating earnings per share.”
“For many industries, so-called accrual accounting, which lets companies book sales when they contract for them rather than when they receive the cash, makes sense. The revenues will eventually come. But accrual accounting doesn’t apply well to option ARMs, since it’s more difficult to know if unpaid interest will ever cross a banker’s desk. ‘This is basically an IOU that may never get paid,’ says Robert Lacoursiere, an analyst at Banc of America Securities. James Grant of Grant’s Interest Rate Observer recently wrote that negative-amortization accounting is ‘frankly a fraudulent gambit. But what it lacks in morality, it compensates for in ingenuity.’ The Financial Accounting Standards Board, which is responsible for keeping GAAP up to date, stands by its standard but told BusinessWeek in a written statement that it is ‘concerned that the disclosures associated with these types of loans [are] not providing enough transparency relative to their associated risks.'”
————
Now to try and find that business week article….
Also, over at Calculated Risk, Tanta, a long-time lender insider, details these accounting issues regularly. It is treated as noncash iincome on the books.
Here’s the Business Week article:
http://www.businessweek.com/magazine/content/06_37/b4000001.htm
Brian, Thanks so much–that’s a great compliment especially since it’s coming from you! Today is pretty booked so I won’t be able to respond to any comments until later.
billruben,
You da man! Thanks. I’m not saying there is anything sinister about the practice, just that a bank that is in trouble may be able to mask that fact by digging a deeper hole – as bizzarre as that may be.
It would seem the entire mortgage lending sector has bet the entire farm (both your farm and my farm) on two things:
Real estate always goes up
the FED will save us.
That’s a very bad bet.
The Neg-am as earnings is old news. Here’s an Aug 06 article from Barrons detailing WAMU’s Neg am loan portfilio stating that 55% of neg am loans by value are being paid at less than the full interest rate. WAMU has been unusually forthcoming about their loan portfolio compared to other lenders. Good for them.
http://www.tpmcafe.com/blog/moonlore20002001/2006/aug/23/the_no_money_down_disaster
Intersting to note WAMU has since moved to book MORE neg-am loans, so obviously they’re positive on that segment of the market.
First Fed Financial – 67% of 2Q06 pretax profits were phantom interest related
GoldenWest Financial – 60%
Where there is smoke, there is fire.
Enjoy.
Yeah – kinda makes painting retaining walls and placement of folding tables seem like fiddling while Rome burns.
Everyone has their own perspective, I guess.
bill waters,
Yes, this is not a new accounting method. My point is the exotic subprime is relatively new, and the combination of the two may prove to be unhealthy for lending institutions (especially shareholders).
The fact that WM is moving aggressively to neg-ams kind of shores up my belief that there might be some problems in their future.
Remember, 22% of subprime is delinquent. This number will grow as we move into the readjustment period. It will grow exponentially as property prices decrease and interest rates rise.
We have a certain local mega-bank sitting just off an all time high in its stock price, with a truckload of phantom interest on the books. Add in that subprime lending is the bird flu of finance, and they have a bunch of it, much of which will never ever ever be repaid, and you have the recepie for a full-blown crisis.
Just how did Enron go down? Risky contracts? Selling energy it didn’t have? Creative accounting?
Eleua, I watched “Enron – Smartest Guys in the Room” documentary recently – one of the techniques they used to boost revenue was to book the expected future profit from projects/investments/acquisitions in the quarter that the contract was signed, rather than after the income had been received. Have to say my first thought was “Gee, that sounds like the way banks treat deferred interest”.
Needless to say, the “future profit” from many of these ventures turned out to be much lower than projected.
“Remember, 22% of subprime is delinquent.”
What?/ Where are you coming up with this number? The Center for Responsible Lending? The MBAA has discredited their funky math already.
The formerly cited GAAP procedures have nothing to do with reserve requirement accounting. Reserve requirements are the safety net of the banking system. So while Wachovia (Golden West has been bought by them) may book a “profit” the OTS won’t allow it to be booked towards reserve requirements.
Come on guys! You make some good points but grind your axe with some knowledge of banking.. The so called “exotic loans” you cite are in a danger zone but hardly the Armageddon-like proportions you predict.