Banks Prefer To Ignore Inconvenient Rules

13 Jan Banks Prefer To Ignore Inconvenient Rules

In 1993 accountants changed the rules for lenders to try to protect us all from another savings & loan disaster. But bankers were not concerned. Now they would like us all to forget the rules so they can use “better” numbers in their books.

It turns out that the banks never really thought they could fall into the same sort of mess as the savings & loan industry in the 1980s. They never believed residential real estate could decline in value on any large scale. So according to the New York Times, they never built their computer systems to help them account for thousands and thousands of mortgage loans which have to be written down through foreclosures or work-out agreements with homeowners, or for the dramatic losses that are likely hidden in their other mortgage-related investments.

So even though the accounting pronouncement by the Financial Accounting Standards Board, known as FAS 114 has been in effect since December 15, 1994, the banks just can’t keep up with the calculations to keep their books reflecting reality. Instead they are trying to convince the accountants to let them, well, fudge the numbers. Can you imagine how they’d feel if you asked to use made-up numbers for your home values?

The plea is a little hard to believe. Banks already apply the rules to commercial loans. It’s not as though there was no warning: Warren Buffet warned of a real estate bubble two years ago. The 1980s experienced plenty of real estate bubbles. And, as Floyd Norris at the Times points out, the “easier” accounting banks want to use also conveniently helps disguise the losses they are experiencing.

Just as their Japanese counterparts did for many years, our banks hope to keep assets on their books at inflated values in the hopes that — one day — the markets will “stabilize” or even “rebound” and the fake numbers attached to their collateral will become real. The computer problems would mysteriously disappear if it allowed the banks to claim greater profits instead of losses.

And isn’t it ironic? How many consumers have asked a bank for a little mercy because they miscalculated? They thought they could afford the adjustable rate mortgages that are the assets at issue. They believed their mortgage broker who claimed they’d refinance that ARM if it wasn’t workable. And they thought real estate markets would keep going up so, if all else failed, they could simply sell the house and move on.

So now while consumers are faced with a myriad of rules to comply with before they will even be considered for a mortgage loan modification, and bankers and their friends fight aggressively to avoid Congress giving consumers any other options, the banks themselves are complaining that complying with the rules is just too hard. Rules that were meant to protect investors and taxpayers from another disaster like the S&L crisis or at least to give us a better idea exactly how bad the crisis really is — by simply telling the truth about what collateral and investments are really worth today.

The reality is the banks don’t want to obey rules which, when you get right down to it, are exactly like the ones they expected you and I to obey. Because it’s just too hard.

Update: This blog was included in the Carnival of Everything Finance, #11 edition! This edition of the Carnival includes over 80 finance-related stories, so give it a look.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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