How exactly did they make money by foreclosing on loans?
I’m well aware of the accounting…
JPMorgan Chade footnote 1.1: We’re gonna foreclose on a bunch of loans via robo-signing. Estimated contingent liability: $50,000,000.
Ya, no…
I didn’t say they weren’t in the positive… I know how math works.
They made money selling the loan and then turning right around and selling it again on the way down. Even though they didn’t own it.
Ah yes. They got to sell it twice.
Robo-signing may speed up the foreclosure process, thereby reducing the loss given default (LGD) risk parameter which has a huge impact on a bank’s capital requirements and risk weighted assets (RWA) - see the table below.
And, in JPMorgan Chase’s example we’re dealing with billions and trillions - 50 millions is nothing for them, cost of doing business… Their 2015 net income after credit provisions was 25 billion. Do you still think 50 million hit them hard?
You may have not said it, but you implied that it makes no sense. And it makes perfect sense when your a criminal institution and you have bought off politicians.
It doesn’t make sense for a bank to use robo-signing as anything other than a stop loss measure. Not to make money as you said. Banks don’t make money off foreclosures.
Banks are criminal institutions, just lol…
Has nothing to do with robo-signing, the topic you brought up.
Yes, it is a stop loss measure, which is what I said.
What is their EBITA?
I probably agree, though, that $50M is not a big hit for them. Note, I never said it hit them hard.
In this specific case, they can reduce the amount of capital the have to set aside for credit losses (not credit provisions). As the capital is in high billions, any reduction there is orders of magnitude above 50 million US$.
So, to be pedantic, in this case they weren’t making money, they were massaging their numbers to reduce necessary capital.
Although, if I were to push this further, I could elaborate that any reduction in capital has a positive effect on a banks net income…
The general point is - whatever outrageously high number (for the general public) a bank is fined by their respective regulator (or settled), whether it’s 50 million or 1.3 billion in case of HSBC, it has a negligible effect on their balance sheet.
I fail to see where we are disagreeing. They used robo-signing as a means to mitigate losses, which you agree with and is all I said.
I’d be interested to hear your explanation actually.
Why doesn’t it they are getting something that wasn’t theirs. Even if the property sold as an REO for 50% of value.
I don’t follow. If, for example, Chase loans $300K to John Smith for house A @5% and two years later forecloses on Smith via robo-signing, they’ve made very little off the property. Whatever 5% on the loan over 2 years amounts to. The rest is a return of their money. Now they turn around and sell the property to BofA for $150K (50%). They’ve lost $150K minus any interest income.
They would have had to of earned enough interest to cover the lost principle, which mathmatically is of course possible, but I doubt the majority or even most of these robo-signing foreclosures fit the above. Feel free to research and source it, though.
The more likely scenario is that they used the robo-signing and erroneous sales to mitigate their losses. Losses do not make their shareholders money.
Because, in your example, Chase has already sold the loan for a profit and then they either sell the paper or the property that they do not own so they profit again from something they have already sold and do not own. Totally illegal!
Ok, I’ll try to explain it simplified, I used to do this for a living.
Let’s say a bank gives $300K loans to thousands of John Smiths. On average, if the foreclose on him, they get back $150K from the property, after all foreclosure expenses are subtracted. If on average, a John Smith paid $15K interest before he was foreclosed, the result is the following: 300K principal + 15K interest -150K loss, they get back 165K, which means the loss on the principal is 135K.
Now, let’s say that out of a thousand John Smiths with $300K mortgages, 20 are foreclosed. That’s a loss of 135Kx20, but actually they are provisioned as 300x20 because you’ll get the 150K after foreclosure billed as “recovery”. So the initial loss is 6 million on a thousand John Smiths.
Now, you have to set aside capital for future foreclosed John Smiths, which means another 6 mil for a next batch of a thousand John Smiths has to be set aside for future expected losses. And what if there are 40 or 100 foreclosures for a thousand Johns Smiths?
These funds are idle, and have to be kept on the books, they are not given as mortgages to new John Smiths and they are not generating interest. If out of the 6 million you provisioned for those 20 foreclosed, you could give out 3 million as new mortgages to new John Smiths, that would be 10 new $300K mortgage generating interest.
So, these funds not being given out as mortgages have a cost - you got them from somewhere - saving accounts of your clients, borrowed from other banks etc.
So, if on average you reduce your losses on those $300K mortgages to John Smiths, by getting $200K back instead of $150K after foreclosure expenses, you are reducing the amount of provisions for credit losses and future capital requirements and you can use these funds to get interest on new mortgages, thereby making money for your shareholders.
The real story is more complicated, but this pretty much sums it up, especially when we take into account these numbers are actually in billions and trillions.
Thank you for the explanation. Correct me if I am wrong, but it sounds to me like you are essentially saying that the end goal was, in this case, to mitigate losses as a means to reduce doubtful receivable estimates in order to loan more money out that woild have otherwise been held for estimated foreclosures thus creating additional interest income that otherwise would not have been generated. Is that correct? So the net effect of robo-signing is to free up additional capital that would otherwise not be available for ordinary operations thus interest income?
Essentially yes.
I’m not familiar with the exact process in JPMorgan Chase, but if you speed up the foreclosure process or reduce foreclosure expenses you increase the average and predicted recovered amount which is dependent among other things on these two factors, which on thousands and thousands of loans can add up to to a very significant amount which could then generate additional interest income, hence bigger net income.
Reduced credit losses have many positive effects on the bank’s financial position, this is just the major one.