Through the Federal Reserve Systems policy of Fractional Reserve Banking, banks can, and do loan 9x’s the Performing Assets** on their balance sheet. This means 1 million dollars in **Performing Promissory Notes (**Trust Deeds and Mortgages (know as “Paper”) where the homeowner is paying the monthly payment on time every month) can provide the ability for the bank to loan 8.1 million dollars, but only on Performing Assets**.
Example: $1,000,000.00 settled at 50% loss = $500,000.00
Bank net payoff = $500,000.0
After a required 10% Reserve of $50,000.00 deposited with, the Federal Reserve
$500,000.00 – $50,000.00 = $450,000.00
$450,000.00 x 9 = $4,050,000.00
Banks will take a loss of $500,000.00 in order to lend on $4 Million. Moreover, the bank has really loss nothing; the perceived $500,000.00 loss was paid back to the bank via insurances or bail out funds, (MI-Mortgage Insurance, the FDIC-Federal Deposit Insurance Corporation, TARP-Troubled Asset Relief Program, etc.)
The banking system is too important to fail, to “big to fail”, not unlike a few other industries in America; the Automotive for example.
As far as our government is concerned, when it comes to our Banking System, “the name of the game is BAIL OUT.” The banking system is the most important system in America, if it falls, America falls.
If the bank is holding Trust Deeds or Mortgages Notes (Paper) on 6 houses and those houses are valued at $200,000.00 each, that equals $1,200,000.00 in property value.
But if the mortgages against those houses is $450,000.00 each; then the bank is holding $2,700,000.00 in mortgages, and the homeowners are not paying; these notes are considered Non-Performing Notes (NPN’s) and worst yet the secured value is $1,500,000.00 negative.
The bank is holding a non-performing asset, which shows as a liability on their balance sheet.
Check out the numbers:
(Bank allowing Short Sale or Discounted Payoff)
Present Value of houses = $1,200,000.00
$1,200,000.00 x 50% = $600,000.00 perceived loss for the bank
$600,000.00 actual net for the bank after $600,000.00 perceived loss
10% Fed Reserve Requirement = 60,000.00
$600,000.00 – $60,000.00 = $540,000.00
$540,000.00 x 9 = $4,860,000.00
Here is how it works: (okay now, try to follow the numbers; it’s tricky)
$4,860,000.00 at 4.875% for 30 years = Monthly Interest of $19,743.75
– 10% of $19,743.75 = $17,769.37
$17,769.37 x 9 = $159,924.37
$159,924.37 @ 4.875% for 30 years = Monthly Interest of $649.69
– 10% of $649.96 = $584.72
$584.72 x 9 = $5,262.51
$5,262.51 @ 4.875% for 30 Years = Monthly Interest of $21.37
– 10% of $21.37 = $19.23
$19.23 x 9 = $173.09
$159,924.37 + $5,262.51 + $173.09 = $165,359.97
From the interest alone, that the banks can generate after 3 months, (the first quarter or Q1); they have created $165,359.97; a completely new mortgage loan (a Promissory Note) to lend, which they can again Fraction and collect interest on.
After a year (at the end of the forth quarter or Q4) they have generated $661,439.88; well over a half million dollars.
This is the Fractional Reserve Banking System at work; there is no REAL MONEY, it is all ledger balance but looked upon as money by the Central Bank (the Federal Reserve) and our government.
The banks are allowed to charge Interest on this ledger sheet money, and if not paid, they can take the property, to recoup “Loses”.
This type of ledger based balance sheet money is considered as part of what is called the M3 Money Supply. (Research this for yourself)
We as private citizens can not use this as part of our normal business practice; it is illegal for us, unless we are a bank (have a Banking Charter).
This process is OK, per se. There is nothing really wrong with it, per se. But it is not a right or wrong issue, this is how banks create money. But there should be some consideration made for the consumer when the system comes undone, as it has in our past economic environments.
So what do the Banks really lose by settling Mortgage Debt?
Note: This is an abridged explanation of a detailed process. For detailed specifics, educated yourself about the mechanics of the modern money supply.