The mortgage is $600K. While the mortgage owner sits idle, due to the suspension of mark-to-market rules, the mortgage owner is allowed to maintain the fiction that an asset worth $600K is owned.
[/quote]
Analyst, according to a longtime pigg who is very knowledgeable about the banking industry, that isn’t how it works… see this comment for his explanation:
FASB revised the mark-to-market rules in the first week of April, 2009, to be effective for accounting periods ending after June 15, 2009.
The comment by davelj is dated May 8, 2009.
He was describing the situation before suspension of mark-to-market, not the situation that exists today.[/quote]
And confusion reigns…
This comment is not clear: “While the mortgage owner sits idle, due to the suspension of mark-to-market rules, the mortgage owner is allowed to maintain the fiction that an asset worth $600K is owned.”
If the “owner” is a bank – as opposed to a securitization trust – then the above comment is simply incorrect (see link to my earlier post). If the “owner” is a trust managing the asset on behalf of MBS holders then, frankly, I don’t know what the valuation process is. If the loan is part of a liquid MBS, then the market price is going to reflect defaults, etc. within the securitization. The issue is how things get valued within an illiquid private-label MBS that doesn’t trade… more on that below.
Importantly, the link above to the prior post of mine has nothing to do with the MTM revisions made earlier this year. Zippo. My post discussed how banks deal with INDIVIDUAL loans that hit non-performing status. Nothing’s changed on that account.
Importantly – again – the MTM issue within the banking community isn’t really with individual non-performing loans, as I explained previously. The issue is with illiquid MBS and performing loans.
For example, a MBS that trades a lot – that is, it’s liquid – and has a reliable price is going to get marked to market by the bank that holds it. Period. The problem is with the illiquid (“private label”) MBS that don’t really trade, and a price has to be imputed from trading in the CDS market. This is where the suspension of MTM accounting allows banks – mostly the big ones – to play some games.
Additionally, let’s say you’ve got a CRE loan that you originally underwrote at 80% LTV four years ago, it paid down a little principal, but now due to higher cap rates, it’s a 110% LTV loan. And it comes up for renewal in a year. Well, chances are there will be a charge-off if that borrower is unwilling to bring in some equity. But as long as the borrower’s paying on time, the loan remains on the books at par. Technically, the loan’s a little bit underwater. But the bank gets to mark it at par because it’s still paying on time. There are LOTS of these loans out there. Many will be o.k. because the borrower will bring in more equity when it’s time to refinance. Another batch will become Troubled Debt Restructurings, which hurts the bank but isn’t the end of the world. And a bunch will default… which will set off the accounting path I went through in the earlier post.
So, it’s important when discussing MTM accounting to distinguish between performing loans (that might be “underwater”) and non-performing loans. And between illiquid private-label MBS (with no market price, but indications of value via CDS) and liquid MBS which trade.
But a bank with an individual loan that’s not performing doesn’t just get to choose a value – or leave it at the unpaid principal balance – all willy nilly. It just doesn’t work that way. And that has nothing to do with MTM accounting.[/quote]
Davelj may correctly describe some circumstances in which mark-to-market is not effectively suspended, apparently focused on banks holding individual mortgages.
I should have taken more time to specify exactly the subset of organizations I was referring to, who were and are the primary cause of trouble.
This does not change what matters. While there are many lesser components, the heart of the financial crisis is the existence of hundreds of billions (perhaps trillions) of dollars worth of mortgage-backed securities in the hands of Wall Street investment houses and major banks, which are impaired by high and rising default rates. Wall Street was buying the junk from the mortgage brokers, paying the rating agencies to rate it high, and selling it to the world. When the world got wise, Wall Street was left holding lots of in-process junk which they could not move. During the forced marriages which happened at the height of the crisis, some large true banks (as opposed to investment banks) inherited junk from the mortgage brokers and investment banks that they absorbed.
The ever-worsening default rates, now common knowledge to all who are interested, render the mortgage-backed securities unsaleable, because the price the market will pay would result in losses and markdowns of asset value that would render the selling organization insolvent and out of business. This is the state, variously called inactive or illiquid, which is addressed by the Financial Accounting Standards Board in FSP 157-e, which effectively allows the MBS holder to value the securities according to some “internal model” instead of looking to the market.
The internal model is whatever the MBS-holding organization chooses, until the newly identified 29-year old SEC Chief Enforcement Officer decides to push the issue. Since he is an ex-Goldman Sachs employee, I am not expecting much enforcement.
So while you could argue with the absoluteness of my response to AN which triggered all this, it is true that, for the moment, the big players have been given a reprieve by the revised mark-to-market rules, and can hold up foreclosures, and get to choose how much effect it has on their books. Why else do you think Congress threatened to legislate FASB into at least irrelevance, perhaps oblivion, if the rules were not revised?
