Posted by John on September 06, 2009 at 04:33:13:
Not really anything weird here if you know how a bank operates.
The quick and dirty abbreviated version of it is that in a fractional reserve banking system like ours banks are allowed to lend up to 10 times the amount of money they actually have on hand. 10% of the total of all liabilities are kept in reserve as cash or a cash equivalent.
This system of leverage works great as long as everyone is paying their bills. However let assuming someone defaults and they are forced to take back an REO. Now that property is on their books however the associated loan has defaulted. In theory they are suppose to mark down the value of that defaulted loan and property to what they think they may be able to get, something which banks are currently doing all they can do to avoid. Because once you mark down that property you have to realize a loss and build up your reserves. Ideally you would sell it for cash as soon as possible to minimize the costs associated with holding that property but we are currently in a huge real estate bust and very few people have the cash hoarded up to pay all cash. If they can self finance the “sales” via providing financing they get to now get those deadbeat properties off their books and replace them with “performing” loans. As far as their books are concerned they can pretty much make the self financed sales look the same as an all cash sale, thus preserving or reducing their capital requirements. Considering that by self financing they could probably get a higher price and interest income as well, they may even make the sales look better (also helping in their comps for other properties) although in reality they are still riding that property down only now with a different borrower (whom hopefully will not default).