Virginia passes law: state banks can hold foreclosures indefinitely at face value.

[dixiegrrrrl]

Last edited Fri Feb 17, 2012, 06:10 PM - Edit history (1)

Virginia law says banks do not have to mark foreclosures as losses, do not have "mark to market"
but can hold onto foreclosures "indefinitely" at face value if they want to.

Bank-owned real estate. Repeals a provision that limits to 10 years the period that banks may hold real estate acquired in satisfaction of a debt previously contracted.
The measure allows state banks to hold such property indefinitely without writing down the asset's value.

http://lis.virginia.gov/cgi-bin/legp604.exe?121+sum+HB708

I am certain this law will be introduced in other states.

[atreides1]

1. And the Democrats helped pass it.

Go figure...

[mike_c]

2. both parties work for the banks and the 1%....

In a corporatocracy, political leadership either works for big money, or it's irrelevant.

[JDPriestly]

3. Don't put your money in a Virginia bank.

This is not an honest way to account for the value of assets.

[Yo_Mama]

4. But banks are subject to regulation and examination from non-VA sources.

FRB or FDIC, so what Virginia has to say about it doesn't really control what the FDIC or the FRB says about it.

The interagency standards for safety and soundness apply to all supervised banks. Probably the best overview of what the VA law change really does would come from reading this guidance:
http://www.fdic.gov/news/news/financial/2008/fil08062a.html

Note that the supervised institutions are expected to comply with state laws on evaluations, but also have to apply with general financial accounting standards. I can assure you that if a VA bank does not write down a depreciating owned real asset in accordance with its market value, their supervising agency will beat them to shreds. I am quoting some of this, but not all, because it is a bit dry. In general, examiners have always demanded that institutions sell off other real estate owned ASAP, but they are having to be laxer on that. This does not mean that a bank can wind up holding tons of depreciated ORE at unrealistic values:

In general, the accounting and reporting standards for foreclosed real estate are set forth in Statement of Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings (FAS 15), and Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144). In addition, certain provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position 92-3, Accounting for Foreclosed Assets (SOP 92-3), have been retained because they represented prevalent and safe and sound banking practices. The provisions retained from AICPA SOP 92-3 include that when an institution receives ORE from a borrower in full satisfaction of a loan, the long-lived asset is presumed to be held for sale, and the institution should initially record the ORE at its fair value less cost to sell.

The life cycle of foreclosed real estate consists of three phases: acquisition, holding period, and disposition. Banks should ensure that proper accounting policies and controls are in place during each phase (see summary of the three phases below). Management should refer to the applicable accounting standards and the Instructions for Call Reports to determine the appropriate regulatory reporting of ORE based on the specific facts and circumstances relating to the property and related transactions. Management is encouraged to consult with knowledgeable accounting professionals as necessary, especially in those situations where the transaction is uncommon or complex in relation to the bank's expertise.

Accounting for ORE at Acquisition

Foreclosed real estate received in full or partial satisfaction of a loan should be recorded at the fair value less costs to sell the property at the time of foreclosure. This amount becomes the "cost" of the foreclosed real estate. According to FAS 144, "costs to sell are the incremental direct costs to transact a sale," which include "broker commissions, legal and title transfer fees, and closing costs that must be incurred before legal title can be transferred."

When foreclosed real estate is received in full satisfaction of a loan, the amount, if any, by which the recorded amount of the loan exceeds the fair value less cost to sell the property is a loss which must be charged to the allowance for loan and lease losses at the time of foreclosure.1 The amount of any senior debt (principal and accrued interest) to which foreclosed real estate is subject at the time of foreclosure must be reported as a liability in the Call Report as "Other borrowed money." Legal fees and other direct costs incurred in a foreclosure should be expensed as incurred.

Accounting for ORE during the Holding Period

After foreclosure, each foreclosed real estate asset must be carried at the lower of (1) the fair value of the asset minus the estimated costs to sell the asset or (2) the "cost" of the asset. This determination must be made on an asset-by-asset basis. If the fair value of a foreclosed real estate asset minus the estimated costs to sell the asset is less than the asset's cost, the deficiency must be recognized as a valuation allowance against the asset which is created through a charge to expense. The valuation allowance should thereafter be increased or decreased (but not below zero) through charges or credits to expense for changes in the asset's fair value or estimated selling costs. Changes in the valuation allowance should be recorded in Schedule RI – Income Statement, item 5.j, "Net gains (losses) on sales of other real estate owned," of the Call Report.

[dixiegrrrrl]

6. I am trying to remember the last time the Feds enforced any of the banking laws..

The valuation of real estate assets in banks has been a bone of contention for a long time now, and so far the banks are STILL resisting
the law.

[mbperrin]

5. AKA the Potemkin Plan for bank assets.

Wow.

[jtuck004]

7. Banks don't make any money by holding onto assets.

And they have to pay property tax on what they hold, so there are ongoing expenses. And virtually no one is going to buy assets for previously inflated values for the foreseeable future, so it will get marked down at some point.

I wonder if they are doing this to bring it in line with the federal accounting law that lets banks keep fantasy valuations on their books.

On the other hand, it smells of ongoing fraud.

It's interesting that they saw the need to remove a 10 Year limit. They must expect no one will have any money to buy, especially at some previously attained fictional value, for another decade. Optimists.

[dixiegrrrrl]

9. The reason banks CAN hold onto "assets" is

because they can call them assets instead of debt.
Therefore the banks look healthier than they are.
If the banks had to declare all the foreclosed, empty houses as Losses, it would show that banks have a minus balance sheet.
In reality, what good is it owning a foreclosed 100k home if you can't sell or rent it?

[westerebus]

8. A message from the right on mortgage robo fraud settlement.

As in: "Dear Washington DC, we don't need to comply with your proposals or regulations, as the government of Virginia is much to busy with social policy as in denial of rights and accomodations to citizens the state government deems to be offensive based on the latest polling from the faux mews school of theology."

thank you and have a blessed day

[Hugin]

10. Welcome to "It's (not so much) A Wonderful Life."

Potter has won.

"Daddy, Teacher told us... Every time a bell gavel rings an angel bankster gets their wings way!"