SAN FRANCISCO, CA -- By choosing foreclosures to short sales, and stockpiling billions in foreclosed properties, U.S. banks are postponing the inevitable --- a necessary but painful hit to their financial statements.
Worse, the banks' stockpiling-versus-disposing reo's has stalled the recovery of the commercial and residential real estate markets.
As First Tuesday showed in a recent post, a 2009 change in accounting policy by the Financial Accounting Standards Board (FASB) allows lenders to delay recording losses on foreclosures until a foreclosed property is sold, while losses from a short sale must be marked immediately.
"Instead of focusing on clearing out their patently unmanageable profusion of foreclosures, banks are adding to it. They are unwilling to take a direct and immediate principal reduction hit for the benefit of consumers, the nation’s housing policy and the greater real estate market — all of which are partially to blame."
In our direct dealing with lenders of foreclosed California retail property, time and again we find lenders unwilling to negotiate a contract that reflects the true value of the REO.
One of the largest U.S. lenders has established a sprawling REO property management operation in Texas. They refuse to consider any price that will result in a markdown of the loan they originated. They intend to wait many years if necessary before selling their REO's.
By 'kicking the can down the road' U.S. banks only postpone the full recovery of the Great Recession, and their balance sheets. We must have a honest market. What we have is an artificially solvent lending environment where only the top borrowers can find the financing to purchase properties, or pay all cash.
So we have a depressed housing market, high unemployment, and cash heavy U.S. corporations which are not hiring.