American Banker’s Kate Berry has a very interesting piece on the pile of bad mortgages the big banks still have on their books—ones that they’re almost certainly not accounting for correctly.

The Banker reports that the biggest four banks—Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo—alone have $57 billion in “seriously delinquent” FHA mortgages that they’re not writing down:

The banks… have assured investors in the footnotes of quarterly filings that the loans are government-insured and therefore pose no threat to their bottom lines, even if they end up in foreclosure. What’s more, the banks have used these supposedly iron-clad government guarantees as a pretext for continuing to classify the loans as performing and for holding no reserves against them.

Why aren’t the Big Four aren’t taking the losses? For one, because of the threat that the FHA will slap them with huge fines for violating the False Claims Act if the mortgages were fraudulently put together, which a big chunk of them surely were. For another, they may not be able to find the documents because of years of robosigning.

And this is particularly interesting:

Some observers suggest that the loans could sit on the four banks’ balance sheets until they settle existing disputes with the FHA over their underwriting. B of A and Citibank have already negotiated settlements over False Claims Act violations with the FHA or are in the midst of doing so.

The settlements are to resolve claims involving an unknown amount of previously filed FHA claims that could date back a decade or more. After the legal claims involving these mortgages are cleared up, the banks will be able to file new claims for loans still on their balance sheets.

So extend and pretend, tie up all their liability with a settlement, and then get much of it back via the FHA, anyway. That sounds about right.

This is hardly the only questionable accounting banks have used during the crisis. The OCC said last month that banks “may be fudging their numbers,” in Jon Weil’s words, by aggressively releasing loss reserves to pad their profits.

Nice watchdog work by the Banker here.

 

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.