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.
