The WSJ takes on
alleged improprieties at banks, which isn't exactly a novel topic these days.
The story zeroes in on the games played with non-performing assets -- a subject near and dear to HW's own editorial heart these days, given that we've been suggesting that many banks are under-reserving relative to the level of reported NPAs on the books.
But when is an NPA not an NPA? Answer -- when you get to pick the definition:
In January, Astoria Financial Corp. told investors that its pile of nonperforming loans had grown to about $106 million as of the end of last year. Three months later, the thrift holding company said the number was just $68 million.
How did Astoria do it? By changing its internal policy on when mortgages are classified on its books as troubled. The Lake Success, N.Y., company now counts home loans as nonperforming when the borrower misses at least three payments, instead of two.
Whether kosher or not, the only thing that firms like this really do when they move numbers around is buy time -- in the end, losses will push through. A bad loan will eventually default regardless of the accounting treatment, and in the case of a bad mortgage, the bank will eventually take the house back and have to wait to resell it before a loss is recognized.
The only question is to what degree investors will be surprised when it eventually happens. Wells Fargo gives a perfect example of this conundrum, from the same WSJ story:
At Wells Fargo & Co., the fourth-largest U.S. bank by stock-market value, investors and analysts are jittery about its $83.6 billion portfolio of home-equity loans, which is showing signs of stress as real-estate values tumble throughout much of the country.
Until recently, the San Francisco bank had written off home-equity loans -- essentially taking a charge to earnings in anticipation of borrowers' defaulting -- once borrowers fell 120 days behind on payments. But on April 1, the bank started waiting for up to 180 days.
There is a possibly
a good reason for this -- committing to longer workout horizons with troubled borrowers before charging off the loan and walking away as a lender would lead to such a change. Consumer advocates have been hounding lenders to do just that; and now that Wells is doing it, the WSJ jumps in with a story about how it's playing a shell game with NPAs.
But the flip side of the coin is equally true. Past experience in distressed debt informs us that borrowers already 120 days in arrears are especially likely to remain in arrears when they hit the 180 day mark a few months later; which means that write-offs could possibly be pushed out further before hitting income.
Which side is right? I have a sneaking suspicion that both are, oddly enough.