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  • matollionequay matollionequay Feb 16, 2009 1:29 PM Flag

    60 min piece last night shows how bad it really is for banks.

    The estimates as early as last summer on the total losses due to the excessive lending practices were around 1.4 trillion. The best early work came from a highly reputable fund in Switzerland. I think 60 minutes may be a little late with the "news" and maybe a decimal point off.

    If the entire economy becomes derailed then BBT gets derailed along with it.

    However, the possible saving grace for BBT is that it did not make the loans that were characterized by features such as "no documentation of borrower's income", "no research into borrower's credit history", and "no down payment".

    But if BBT has mortgage loans to people
    for 80% of a house's value in 2006 or 2007 and the borrower lost his/her job, then we have that problem. The combination of job loss and house value loss is a killer.

    But a person with the 20% downpayment coming from his/her own $ in a property who is still working probably has enough on the line to keep paying the mortgage and wait, with the rest of us, for inflation to come back and make the house worth what they are paying.

    Here's where "mark to market" could come into play for BBT and strangle it. Assume they have 100 units of mortgage loans on the books with some reserve for losses already made. The "stress test" regulator shows up and says "You can't sell your 100 units for what you have them booked at. Take a 30 unit charge." KK says "I don't want to sell them. They are performing. They are worth what I value them at becuse they are current on their payments and will continue that way."

    The regulator wins the argument. If BBT gets forced to sell the loans, BBT gets screwed even if KK is right. The purchaser makes the $.

    Obama and the stimulus plan have nothing to do with this except to possibly stimulate employment but it won't change the "stress test".

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    • For some reason BBT has gone from $45 to $15???

      Did anyone listen to the cc last week??

      Is BBT hiding something???

      bd

      • 1 Reply to bigdaddy38372
      • "Here's where "mark to market" could come into play for BBT and strangle it. Assume they have 100 units of mortgage loans on the books with some reserve for losses already made. The "stress test" regulator shows up and says "You can't sell your 100 units for what you have them booked at. Take a 30 unit charge." KK says "I don't want to sell them. They are performing. They are worth what I value them at becuse they are current on their payments and will continue that way."

        The regulator wins the argument. If BBT gets forced to sell the loans, BBT gets screwed even if KK is right. The purchaser makes the $."

        Good grief! Your scenario is illogical and is a gross violation of the basic accounting axiom of matching revenues and expenses.

        Bbt does not mark to market performing loans. Furthermore, they do not have any toxic securities available for sale.

        Bbt establishes loan loss reserves based on estimated cumulative default rates and cumulative loss severity rates over the life of the loans. For example, bbt could assume that their 2006 residential mortgage vintage has a default rate of 5% and a loss severity rate of 40%. The product is a 2% cumulative loan loss rate which would be accrued as part of the quarterly provision for loan losses over the life of the 2006 vintage. Offseting the quarterly provision for loan losses is the net interest income earned from the 2006 vintages.

        Bbt does not practice gain on sale accounting. They practice portfolio accounting. Huge difference. I think many folks have lost sight of this fact particularly Dr. Doom, Nouriel Robinni, who might want to enroll in a finance 101 course at NYU.

        Therefore, when the fed performs their stress test, they also have to include 2009 net interet income for bbt which will total about $5 billion for the year which is more than 3 times 2009 estimated charge-offs and 6 times actual 2008 charge-offs.

        P.S. Also, the Fed will be hard pressed to poke a hole in bbt sfr adc loans where the 12/31/08 reserve exceeded all deliquent adc loans by a factor of 2 to 3 even if the sfr adc loans were only 1 day late.

        Eventually, we will get some sanity from maybe a few analysts who understand the difference between gain on sale accounting vs. portfolio accounting.

 
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