A Look Inside The Housing Crisis

The Cleveland Federal Reserve just posted a series of maps on its web site detailing the impact of the Housing Crisis on Cleveland, which is one of the hardest hit cities out there.

Chart 1 shows that an astounding number of loans are in REO status. Three zip codes encompassing East Cleveland, Cleveland and Cuyahoga Heights have anywhere from 3.3% to 8% of loans in this status. I guess the Cleveland Fed couldn't find a color darker than red to give us more granularity than that.



Map 2 shows the number of homes in foreclosure:



Again the same zip codes and up to 15% in foreclosure or bankruptcy.

The last map shows the number of speculators in the market:



Anywhere from 27-40% of the homes in these zip codes are owned by speculators.

The scary thing is that this data is as of January, so it is probably worse than the charts show.

You can look at the original publications here at the Cleveland Fed.

Games Banks Play - Number Five

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:

There are strict requirements regarding the sale of OREO by Banks in terms of the cash down payment by the buyer. FASB 66 states that:

"The buyer's initial investment shall include only:

(a) cash paid as a down payment.

(b) the buyer's notes supported by irrevocable letters of credit from an independent established lending institution.

(c) payments by the buyer to third parties to reduce existing indebtedness on the property.

(d) other amounts paid by the buyer that are part of the sales value."

Banks cannot lend money to the buyer to finance the purchase of OREO - or as the Comptroller of the Currency has put it:

"The cash down payment requirement of FAS 66 can be satisfied only with the borrower’s personal funds, funds borrowed from an unrelated source, or an irrevocable letter of credit from a third party. This requirement for a cash down payment generally is not met when a bank provides the borrower with an additional loan for working capital or when the borrower’s down payment is obtained by draws on an unrelated line of credit with the bank."

Part One

Part Two

Part Three

Part Four

Games Banks Play - Number Three

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:

Held for Sale Account - When a bank intends to sell a loan, it puts it into an account called "held for sale." A bank may use this account to stuff poorly performing loans. Accounting rules say a charge to the Allowance for Loan and Lease Losses (ALLL) must be made at the time the loan is transferred if the loss is due to credit factors. If the decline is the result primarily from interest rate fluctuations or changes in foreign exchange rates, known as market factors, it should be recorded as a charge to a noninterest expense account. I suppose an unscrupulous bank management can hide losses by claiming a decline in value due to "market factors" rather than "credit factors."

Part One

Part Two

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