Foreclosures and Voodoo Accounting Put Banks at Risk
Posted by: Matthew Dunaway
March 18, 2008
Topic: Foreclosure
In the March 24, 2008 issues of BusinessWeek, Mara Der Hovanesian has an excellent article revealing the precarious position many banks and lenders have put themselves in by hawking exotic mortgage products, such as option-arms to consumers and homeowners. Hovanesian details the shady accounting of many mortgage lenders which makes their earnings look better than they actually are. But as we've seen with the Countrywide debacle, accounting can cover-up for only so long, eventually the numbers don't lie. Banks, mortgage companies and lending institutions have been having to write down billions of dollars in defaulted mortgages, so much so, that the banks are now in danger of not having enough funds in reserve to cover such losses. This is bad...really bad; ala Bear Stearns bailout
How did we get here? How did we get from anybody with a pulse getting a home loan and perpetually increasing home values, to this? In a word, greed. Greed on behalf of the financial instituions and greed on behalf of American consumers. Wall Street, banks, mortgage companies and financial institutions weren't happy with really good revenues; they wanted more. Likewise, Americans are not happy with $250,000 houses; we must have $500,000 houses.
I realize this analysis will upset both sides. Lenders blame consumers for not paying their mortgages. Homeowners blame lenders for hawking exotic mortgages that few people fully understand. Combine this with the bundling of mortgages, which are later sold and re-sold, and you have a recipe for disaster.
How do we fix the problem? Many people advocate the government step, as they did with Bear Stearns. Others advocate legislation that would cut mortgage interest rates or even principal amounts owed. Likely, there will be an amalgum of "solutions", from interest rate cuts to new legislation. At the end of the day though, I believe it will take time (probably into 2010) and a lot more pain in the form of financial losses, both corporate and personal.
If you have questions about your mortgage, foreclosure, bankruptcy or any other consumer law issues, please contact me.
