Big Banks 'Phantom Income'

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Here is an aspect of the mortgage foreclosure story you may not have heard about: US banks are apparently booking income on cash flow that they have not yet received, according to a recent article on

Basically, what's happening is this: The way accounting standards are currently structured, banks are allowed to accrue interest on their nonperforming loans. In essence, the banks are showing revenue they have not yet received—and reflecting on their balance sheets the value of assets to which they are legally entitled, though they have not yet taken possession. Foreclosing on those assets is a lengthy process. On average, it takes 16 month to complete the foreclosure process.

All of these accounting gymnastics are perfectly legal—and, apparently, the regulators are totally copacetic with it.

The story comes to us from Robert Lenzner of Streettalk blog.

Lenzner writes: "All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a result, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks."

The practice may be incredibly widespread:

"This means that Bank of America, Citigroup, JPMorgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed," writes Lenzner.

When you aggregate the total amount of exposure the banks have, the figure is eye-popping.

Once again, from Lenzner: " Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans, suggests Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs."

Yet another interesting wrinkle in a story that seems to only get uglier.

Companies mentioned in this post

Bank of America



Wells Fargo


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