Over the past year or so, I have written quite a bit about the non-performing loans issue at the banks. One of the big issues has been that the banks are not pursuing recovery of losses being incurred as borrowers fail to pay. Most of these involve mortgagors who are in default on their mortgages.
So, the question as to why don't the banks foreclose naturally arises. The simplest answer to that question is that many of these mortgages have a guarantee that requires the government to pay the banks for the payments not being made by the borrowers. This applies to mortgage loans originated through the Federal Housing Administration (FHA) and Veterans Administration (VA), which are sold to investors as Government National Mortgage Association (GNMA) bonds.
To keep this simple I will again analyze the situation as it applies to the big four money centers, JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C). (There is a unique situation at JPMorgan, so I will address it last.)
Bank of America has about $41 billion worth of loans that are more than 90 days past due but are still accruing interest. About $29 billion (70%) of them are in the form of GNMA bonds. When a mortgage borrower fails to make their payments, the U.S. government is required to make them to the bond holders.
At Wells Fargo, $20 billion of $29 billion (69%) in 90-day past-due loans that are still accruing interest are GNMA's. At Citibank $4.5 billion of $7.5 billion (60%) are GNMA's.
When the borrowers default, the banks collect from the government and the urgency to begin the recovery process and send the loans through short sale or foreclosure is negated. The banks can then focus on putting their non-government guaranteed loans through the recovery process instead. However, as we've discussed in the past, they are even slow on doing that for fear that it would have a negative impact on asset values and their performing loans.
Further, even as the market meme has been that a housing recovery is under way, the value of non-performing GNMA and other government guaranteed bonds at BAC, WFC, and JPM has risen steadily over the past three years. Bank of America's portfolio of non-performing government guaranteed bonds that are being fully subsidized by the U.S. taxpayer has increased from about $16 billion to $37 billion. At Wells Fargo, it's been $19 billion to $25 billion, and at JPMorgan it's $12 billion to $14 billion. Citibank has experienced a decline from about $8.5 billion to $6 billion.
The game plan followed by the banks appears to be allowing borrowers with FHA mortgages to go into default and stay in the property in perpetuity without making payments because the government is paying the missed mortgage payments.
Strangely though, JPMorgan carries its GNMA bonds as not accruing interest. I don't know why it would do this because it certainly could collect the interest from the government if it wanted to.
So the next question is: How long can this go on? In the past three years, all four money centers have reduced the value of their non-government guaranteed non-performing loans by about 50% and it is reasonable to assume that they will need another three years to reduce it to levels that prevailed prior to the financial crisis of 2008.
During the interim, it is probable as well that the banks will continue to be slow in sending FHA/VA loans through recovery and that the value of these loans being carried by the banks as GNMA bonds will increase.
For the banks and investors in them, as well as the defaulted mortgagors, this is a great deal. For the U.S. taxpayer, not so much.