Foreclosure Homes Accounting Change
There are some pending accounting changes for banks that will greatly affect how they handle their non-performing assets. I’ve blogged about this earlier in the year and have been keeping a close watch on this very important issue.
If you haven’t heard, the big accounting change is how banks book their losses. Rather than adjust their valuations and losses at the time of sale, they will have to price all assets at today’s market value and step up their losses now.
There will be a big ripple effect from this changes, as banks will need to offset their stepped up losses by accelerating their selling of their foreclosures, to raise much needed cash. As I just blogged “Shadow Inventory, 1.4 million foreclosure homes to hit the market” we have a big backlog of foreclosure inventory to work through.
This convergence of both excess inventory and accounting rule change is going to create a huge opportunity for foreclosure investors. I’ll be sharing how to take advantage of this once in a lifetime opportunity in my Strategy Session “5 Overlooked Ways to Master REO Foreclosures” live tonight.
Here are exerpts from the original report from the Wall Street Journal… Rule Change Would Shift Loan-Loss Accounting
U.S. and international accounting rule makers have agreed in principle on a new standard for recording loan losses that may require banks to book some losses more quickly.
Under the new plan, banks and other financial companies would shift to an “expected-loss” model, under which they would book losses and set aside loan-loss reserves based on future projections of losses. That would differ from the current system, known as an “incurred-loss” model, which requires evidence that a loss actually has occurred before the loss can be recorded.
A move to using future loss projections would have the effect of accelerating the booking of losses.
Some critics have said the current system led banks to record losses on a too-little-too-late basis during the financial crisis. In response, the U.S. Financial Accounting Standards Board and the International Accounting Standards Board in January proposed a shift to the expected-loss model. They reached agreement on their approach in a joint meeting last week in London, representatives of both boards said.
Under the system agreed to by the two accounting rule makers, companies would book loan losses upfront if the cash flows aren’t expected to be collected within the next 12 months. Further losses over the loan’s lifetime would be recorded if banks determine the loans’ credit quality has deteriorated to a “more than insignificant” extent and there is enough of a possibility of default that the contractual cash flows from the loan may not be recoverable.
According to a recent report from Accountacy Age “Expected-loss model “well on the way”“…
“The incurred loss model provides too much leeway for procrastination and has to go.” IASB chairman Hans Hoogervorst said that both the IASB and FASB “are convinced that we need a more forward-looking impairment model”. “In fact we are well on our way to completing an expected loss model.”
It is clear this bank accounting change is going to happen. The REO flood gates are openning. Are you ready? What is your plan? Do you have your key contacts in place? Would you like to discover the five forgotten strategies to purchase REO foreclosures for hugh discounts? If so, join me tonight for the rest of the details.
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