A 4-year-old accounting regulation that standardizes how banks acquired loans is expected to help the banking industry gain revenues and reduce Bank Owned Foreclosures.
JPMorgan Chase is set to gain $29 billion due to an accounting rule that allows it to transform bad loans into income. The bad loans were part of JPMorgan’s acquisition of Washington Mutual.
Also set to make some profits from home lending acquisitions are Wells Fargo which purchased Wachovia, Bank of America which took over Countrywide Financial and PNC Financial Services Group which acquired National City.
The acquisition deals provide a total of $56 billion in accretable yield, which represents the difference between the cash flow banks are expected to produce and loan values on their balance sheets.
With the escalating foreclosure and unemployment rates in the country, the banking companies have no choice but to invoke the accounting rule that standardizes the way they book acquired loans that have depreciated credit quality.
Former executive at Lehman Brothers Holdings, Robert Willens explained that banks can earn revenues by applying the rule to commercial and mortgage loans that have lost value during the financial crisis.
Meanwhile, when JPMorgan acquired Washington Mutual for $1.9 billion, it used the purchase accounting method to allow it to record deteriorating loans at fair value. This created a mark down of 25 percent on almost $118.2 billion assets.
JPMorgan is expecting to earn $29.1 billion as borrowers are starting to pay their debts. RBC Capital Markets analyst Gerard Cassidy explained that the purchase-accounting regulation offers incentive to banks to mark down troubled loans they acquire.
JPMorgan acquired Washington Mutual’s loans and deposits after that latter was seized by regulators in a widely-publicized bank failure. A total of $29.4 billion in write downs of Washington Mutual’s holdings was taken over by JPMorgan, with majority for home-equity loans and adjustable-rate mortgages.
The lender said that Washington Mutual’s loans produced $1.26 billion revenue and gave it a potential accretable-yield balance of $29.1 billion.
