Required reserves waived for banks?

Hi, folks. The short sale gurus have been saying for years that a big motivating factor for banks to accept discounted short sale offers is that the federal government requires them to hold anywhere from 3 to 8 times of every dollar of bad debt in reserves. For example, if a bank takes back a house in foreclosure with $100,000 still owed by the debtor, that bank is not allowed to lend out anywhere from $300,000 to $800,000 since it must keep this in reserve for taking back the $100,000 of bad debt.

I just heard that, because of the mortgage loan mess we are in now, this requirement has been waived and banks are no longer required to keep money in reserve for bad debt taken back. Has anyone else heard this? If this is true, it may make short sales a lot more difficult.

This is not the case. Banks do not hold reserves in excess of the bad debts on their books. Federal regulators require banks to assess the fair market value of every problem asset (loan) and set aside reserves for any estimated loss they might take on said asset. For instance a $100,000 loan gone bad and secured by a house with a fmv of say $80,000 would require the bank to set aside $20,000 for the estimated loss. Banks are motivated to accept short sales because it mitigates their losses, allowing them to get say 70 cents on the dollar that they can then go out and reinvest rather than sitting on a nonearning asset for any length of time. Gurus spout this stuff to make themselves sound impressive and knowledgeable.

Thank you for the reply, 71tr. I recall mentioning this bad debt reserves issue to a loan officer for Wachovia Bank back in 2005 and he said that they are supposed to hold reserves for bad debt taken back but the way they got around it was they had another company set up in which to hold the houses, I think he said it was called Prime Assets or something similar, so the bank didn’t have to comply with it.

Maybe he was mistaken about the reserves as often employees at big organizations don’t really know how their own companies work. Are you a banker or do you have direct access to a loss mitigator for answers to your questions? What you say does make a lot more sense than the 3 to 8 times reserves thing that the gurus like to spout off.


Wachovia probably setup a non-bank subsidiary to hold their troubled assets. This gets the assets off their books and out from under the scrutiny of the bank regulators. Funny they would call it ‘Prime Assets’.

I’m a former bank regulator myself having survived the banking debacle of the late '80s and early '90s. It was good experience and I enjoy sharing that knowledge on the boards. Yeah, always turn on your BS meter when listening to gurus.

Thank you, again, for generously sharing your knowledge. I hope to reciprocate your kindness soon.