# 011 April 17, 2009
By: Allen Wells
Folks, it’s not over… the banks are claiming that they are making record breaking profits…how can this be? By sleight of hand and accounting tricks, this is how. All approved and assisted by the USG. Goldman Sachs, claimed they had a very profitable 1st quarter, but failed to mention a little gimmick called “changing your fiscal year” for reporting income. Goldman changed their fiscal year ending 2008, thereby ignoring all the losses of December! I guess now the rule is, if you don’t like the results, just make up new ones and use them!
The gullible U.S. public sure fell for it by rushing out this week and buying $5 Billion dollars of new Goldman Sachs stock. Be aware… there is more danger on the horizon for bank profits in the second quarter.
The problem, aptly named by the Daily Reckoning, “The Shadow Inventory of Homes.”
"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage." (San Francisco Chronicle)
Couple this with an article in Wednesdays Wall Street Journal, Banks Ramp Up Foreclosures,
“Some of the nation's largest mortgage companies are stepping up foreclosures on delinquent homeowners. That will likely lead to more Americans losing their homes just as the Obama administration's housing-rescue plan gets into gear.
J.P. Morgan Chase & Co., Wells Fargo & Co., Fannie Mae and Freddie Mac all say they have increased foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which temporarily halted foreclosures.
Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration's housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers' payments to affordable levels. Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws. Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process.
Foreclosures (until now) seemed to be leveling off. However, a strange thing is happening. What we appear to be seeing is what is being called a "shadow inventory" of foreclosed homes. Banks are holding foreclosed homes in their inventory, but not rushing to put them on the market. What is going to happen when this new influx of homes hits the market?
The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off. It is estimated that banks will foreclose more than 2.1 million homes this year. If you divide this by 50 states, that is over 40,000 homes per state this year alone! Certainly the harder hit areas (California, Florida, Arizona) will have a higher number of foreclosures, but can you imagine adding another 3,500 homes per state per month to the already record number of vacant and foreclosed homes?
A recent survey found that only 30% of foreclosures were listed for sale in real estate listings like the MLS. 30 – 40% of homes in the foreclosure process are already vacant. The homeowners have given up and moved on. There is no one for the banks to negotiate with to try and keep the homes off their books. In addition to this, there is a huge market of homes that people cannot sell as a result of not having buyers, or they cannot sell them because the value has dropped below their loan amount. Some of these homes are being rented for less than the monthly payment. What will happen when inflation heats up and the owners do not have the extra cash to make up the differences in payments? Or, if the property owner is one of the targeted “rich” that will have their taxes unfairly raised? Either way, that leaves the home owner with less disgressionary dollars to make payments. The banks may get many of these homes back, starting 2010 and beyond.
This is a double edged sword. If a bank does not try to sell the foreclosed homes, they have to show the non-performing asset on their balance sheets. At some point they will not be able to continue to cover these losses with changing accounting laws and financial sleight of hand. Once they do put these homes on the market, they will drive home prices down even more.
What the banks have is a conundrum, a puzzle that may or may not be solvable:
On the one hand they can foreclose all the non-performing homes on the books (which will show them with major losses);
they can hold off on foreclosing the homes that are in default (which will show them with major income losses);
they can foreclose the homes, spend thousands maybe millions repairing the homes and getting them ready to sell them (which will show on the books as a major expense);
they can flood the markets with homes sold at below market prices (which will lower their ability to recoup their losses).
Any of these options may potentially devastate the already weakened housing market.
I mean… what’s a banker to do?
I thought you might just want to know!
With regards,
Allen
Information contained herein is deemed reliable but not guaranteed.
Really good post. 100% accurate. This is a huge scam, but like you said the public is so gullible they don't even realize what's transpiring before their eyes. The media doesn't report it. It is simply and absolutely amazing in it's indiscreet deceit.
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