Games Banks Play - Number Two

Over the next couple of years, many banks will fail and be taken over by the government or larger institutions. This will be an agonizing process that some banks will try to avoid at any cost. I will explain in a multi part series what to watch out for:

Other Real Estate Owned (OREO) - Banks will take title to many properties during this downturn and put them into a category called Other Real Estate Owned (OREO). This real estate must be recorded upon foreclosure at fair value, with the difference between the recorded amount of the loan and the fair value of the property charged to the allowance for loan losses. I suppose that some Banks will fudge on this "fair value" deduction and try to keep the loss as small as possible. Future writedowns of the OREO must be charged against operating income. Therefore, there will be two hits against banks regarding real estate. First, the difference between the loan outstanding and the fair value at the time title is taken, and second, the difference between this fair value at foreclosure and what the property is finally sold at.

I attended a banking conference in February and was told that current offers for OREO by buyers are in the range of 40-50 cents on the dollar, and that at this time, most banks aren't accepting such offers.

Part One