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Participant[quote=davelj][quote=analyst]
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?[/quote]
That’s right, the big assist with the suspension of MTM is with the illiquid mark-to-model MBS. However, recall that… the “big players” can’t really “hold up foreclosures” for their own benefit. If Citi owns a bunch of exotic MBS, it’s the SERVICERS of the MBS – likely not Citi in most cases – that holds up the foreclosure process, not Citi itself. And this applies to the other big banks as well. Although most of the big banks are in the servicing business, to one extent or the other, it’s not as if Citi, for example, can just call up the servicers of MBS that they own and tell them what to do. But, MTM suspension does give them more leeway in how they value these piles of shit. No doubt about that.
Another thing to keep in mind is that a huge pile of the trillions in shitty MBS aren’t owned by US banks – this crap is spread among myriad institutions all over the world. So, the domestic banks have a lot of really horrific MBS to work through, but they own a fraction of the total.[/quote]
Yes, ownership of mortgage-backed securities is distributed around the world in many different kinds of organizations. Since the face value was 7.5 trillion dollars at the end of 2008 according to the Federal Reserve statistics, it does not require a high percentage of them to behave abnormally to have a market-altering effect.
—–
It is correct that a partial owner of a mortgage-backed security pool does not have direct control. However I am confident that the 100% owner of a mortgage-backed security pool can make whatever agreement between owner and servicer that the owner is willing to pay the fees for. The same would be true if all the partial owners agreed on a course of action.
—–
Davelj continues to focus on banks.
I have carefully chosen variations of the word “owner” or “holder” rather than “bank”, “lender”, or “investor” for a reason.
The mechanism which matters the most is one I hesitated to go into before, because it is unregulated and its actions are therefore undocumented (to the general public), and proof of any assertion, and rebuttal of any denial, is impossible for an outsider.
The big players bought credit default swaps (CDS) to hedge their financial interests in mortgage-backed securities (MBS). When an entity protected by a CDS suffers a loss on an MBS, and the claim is settled, the settlement may be either of type “cash” or “physical”.
Where there is an active market, the CDS seller pays the CDS buyer the difference between the face value and the market value. For the inactive/illiquid MBS under discussion here, there is no usable market value, cash settlement is not possible, and physical settlement occurs.
Physical settlement means that the CDS seller pays the CDS buyer face value, and takes ownership of the MBS.
AIG was the main player selling CDS coverage to MBS creators and buyers. When the real-estate bubble Ponzi scheme stalled, then collapsed, MBS values were impaired to the degree that massive CDS claims were triggered. AIG became suddenly, hopelessly insolvent. To prevent the effect of AIG failure from cascading through the world financial systems, the federal government took over and arranged for massive amounts of money to flow into AIG to allow the settlement of CDS claims. As usual, the amount of money required was initially underestimated (or at least understated), and multiple cash infusions are now up near a couple of hundred billion dollars. There may well be more in the future.
The settlement of these CDS claims via physical settlement resulted in AIG (read as the federal government) being the sole owner of a massive volume of MBS, now in a position to directly arrange for the managers/servicers of those MBS mortgages to carry out their desired policy.
Participant[quote=davelj][quote=analyst]
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?[/quote]
That’s right, the big assist with the suspension of MTM is with the illiquid mark-to-model MBS. However, recall that… the “big players” can’t really “hold up foreclosures” for their own benefit. If Citi owns a bunch of exotic MBS, it’s the SERVICERS of the MBS – likely not Citi in most cases – that holds up the foreclosure process, not Citi itself. And this applies to the other big banks as well. Although most of the big banks are in the servicing business, to one extent or the other, it’s not as if Citi, for example, can just call up the servicers of MBS that they own and tell them what to do. But, MTM suspension does give them more leeway in how they value these piles of shit. No doubt about that.
Another thing to keep in mind is that a huge pile of the trillions in shitty MBS aren’t owned by US banks – this crap is spread among myriad institutions all over the world. So, the domestic banks have a lot of really horrific MBS to work through, but they own a fraction of the total.[/quote]
Yes, ownership of mortgage-backed securities is distributed around the world in many different kinds of organizations. Since the face value was 7.5 trillion dollars at the end of 2008 according to the Federal Reserve statistics, it does not require a high percentage of them to behave abnormally to have a market-altering effect.
—–
It is correct that a partial owner of a mortgage-backed security pool does not have direct control. However I am confident that the 100% owner of a mortgage-backed security pool can make whatever agreement between owner and servicer that the owner is willing to pay the fees for. The same would be true if all the partial owners agreed on a course of action.
—–
Davelj continues to focus on banks.
I have carefully chosen variations of the word “owner” or “holder” rather than “bank”, “lender”, or “investor” for a reason.
The mechanism which matters the most is one I hesitated to go into before, because it is unregulated and its actions are therefore undocumented (to the general public), and proof of any assertion, and rebuttal of any denial, is impossible for an outsider.
The big players bought credit default swaps (CDS) to hedge their financial interests in mortgage-backed securities (MBS). When an entity protected by a CDS suffers a loss on an MBS, and the claim is settled, the settlement may be either of type “cash” or “physical”.
Where there is an active market, the CDS seller pays the CDS buyer the difference between the face value and the market value. For the inactive/illiquid MBS under discussion here, there is no usable market value, cash settlement is not possible, and physical settlement occurs.
Physical settlement means that the CDS seller pays the CDS buyer face value, and takes ownership of the MBS.
AIG was the main player selling CDS coverage to MBS creators and buyers. When the real-estate bubble Ponzi scheme stalled, then collapsed, MBS values were impaired to the degree that massive CDS claims were triggered. AIG became suddenly, hopelessly insolvent. To prevent the effect of AIG failure from cascading through the world financial systems, the federal government took over and arranged for massive amounts of money to flow into AIG to allow the settlement of CDS claims. As usual, the amount of money required was initially underestimated (or at least understated), and multiple cash infusions are now up near a couple of hundred billion dollars. There may well be more in the future.
The settlement of these CDS claims via physical settlement resulted in AIG (read as the federal government) being the sole owner of a massive volume of MBS, now in a position to directly arrange for the managers/servicers of those MBS mortgages to carry out their desired policy.
Participant[quote=davelj][quote=analyst]
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?[/quote]
That’s right, the big assist with the suspension of MTM is with the illiquid mark-to-model MBS. However, recall that… the “big players” can’t really “hold up foreclosures” for their own benefit. If Citi owns a bunch of exotic MBS, it’s the SERVICERS of the MBS – likely not Citi in most cases – that holds up the foreclosure process, not Citi itself. And this applies to the other big banks as well. Although most of the big banks are in the servicing business, to one extent or the other, it’s not as if Citi, for example, can just call up the servicers of MBS that they own and tell them what to do. But, MTM suspension does give them more leeway in how they value these piles of shit. No doubt about that.
Another thing to keep in mind is that a huge pile of the trillions in shitty MBS aren’t owned by US banks – this crap is spread among myriad institutions all over the world. So, the domestic banks have a lot of really horrific MBS to work through, but they own a fraction of the total.[/quote]
Yes, ownership of mortgage-backed securities is distributed around the world in many different kinds of organizations. Since the face value was 7.5 trillion dollars at the end of 2008 according to the Federal Reserve statistics, it does not require a high percentage of them to behave abnormally to have a market-altering effect.
—–
It is correct that a partial owner of a mortgage-backed security pool does not have direct control. However I am confident that the 100% owner of a mortgage-backed security pool can make whatever agreement between owner and servicer that the owner is willing to pay the fees for. The same would be true if all the partial owners agreed on a course of action.
—–
Davelj continues to focus on banks.
I have carefully chosen variations of the word “owner” or “holder” rather than “bank”, “lender”, or “investor” for a reason.
The mechanism which matters the most is one I hesitated to go into before, because it is unregulated and its actions are therefore undocumented (to the general public), and proof of any assertion, and rebuttal of any denial, is impossible for an outsider.
The big players bought credit default swaps (CDS) to hedge their financial interests in mortgage-backed securities (MBS). When an entity protected by a CDS suffers a loss on an MBS, and the claim is settled, the settlement may be either of type “cash” or “physical”.
Where there is an active market, the CDS seller pays the CDS buyer the difference between the face value and the market value. For the inactive/illiquid MBS under discussion here, there is no usable market value, cash settlement is not possible, and physical settlement occurs.
Physical settlement means that the CDS seller pays the CDS buyer face value, and takes ownership of the MBS.
AIG was the main player selling CDS coverage to MBS creators and buyers. When the real-estate bubble Ponzi scheme stalled, then collapsed, MBS values were impaired to the degree that massive CDS claims were triggered. AIG became suddenly, hopelessly insolvent. To prevent the effect of AIG failure from cascading through the world financial systems, the federal government took over and arranged for massive amounts of money to flow into AIG to allow the settlement of CDS claims. As usual, the amount of money required was initially underestimated (or at least understated), and multiple cash infusions are now up near a couple of hundred billion dollars. There may well be more in the future.
The settlement of these CDS claims via physical settlement resulted in AIG (read as the federal government) being the sole owner of a massive volume of MBS, now in a position to directly arrange for the managers/servicers of those MBS mortgages to carry out their desired policy.
Participant[quote=davelj][quote=analyst]
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?[/quote]
That’s right, the big assist with the suspension of MTM is with the illiquid mark-to-model MBS. However, recall that… the “big players” can’t really “hold up foreclosures” for their own benefit. If Citi owns a bunch of exotic MBS, it’s the SERVICERS of the MBS – likely not Citi in most cases – that holds up the foreclosure process, not Citi itself. And this applies to the other big banks as well. Although most of the big banks are in the servicing business, to one extent or the other, it’s not as if Citi, for example, can just call up the servicers of MBS that they own and tell them what to do. But, MTM suspension does give them more leeway in how they value these piles of shit. No doubt about that.
Another thing to keep in mind is that a huge pile of the trillions in shitty MBS aren’t owned by US banks – this crap is spread among myriad institutions all over the world. So, the domestic banks have a lot of really horrific MBS to work through, but they own a fraction of the total.[/quote]
Yes, ownership of mortgage-backed securities is distributed around the world in many different kinds of organizations. Since the face value was 7.5 trillion dollars at the end of 2008 according to the Federal Reserve statistics, it does not require a high percentage of them to behave abnormally to have a market-altering effect.
—–
It is correct that a partial owner of a mortgage-backed security pool does not have direct control. However I am confident that the 100% owner of a mortgage-backed security pool can make whatever agreement between owner and servicer that the owner is willing to pay the fees for. The same would be true if all the partial owners agreed on a course of action.
—–
Davelj continues to focus on banks.
I have carefully chosen variations of the word “owner” or “holder” rather than “bank”, “lender”, or “investor” for a reason.
The mechanism which matters the most is one I hesitated to go into before, because it is unregulated and its actions are therefore undocumented (to the general public), and proof of any assertion, and rebuttal of any denial, is impossible for an outsider.
The big players bought credit default swaps (CDS) to hedge their financial interests in mortgage-backed securities (MBS). When an entity protected by a CDS suffers a loss on an MBS, and the claim is settled, the settlement may be either of type “cash” or “physical”.
Where there is an active market, the CDS seller pays the CDS buyer the difference between the face value and the market value. For the inactive/illiquid MBS under discussion here, there is no usable market value, cash settlement is not possible, and physical settlement occurs.
Physical settlement means that the CDS seller pays the CDS buyer face value, and takes ownership of the MBS.
AIG was the main player selling CDS coverage to MBS creators and buyers. When the real-estate bubble Ponzi scheme stalled, then collapsed, MBS values were impaired to the degree that massive CDS claims were triggered. AIG became suddenly, hopelessly insolvent. To prevent the effect of AIG failure from cascading through the world financial systems, the federal government took over and arranged for massive amounts of money to flow into AIG to allow the settlement of CDS claims. As usual, the amount of money required was initially underestimated (or at least understated), and multiple cash infusions are now up near a couple of hundred billion dollars. There may well be more in the future.
The settlement of these CDS claims via physical settlement resulted in AIG (read as the federal government) being the sole owner of a massive volume of MBS, now in a position to directly arrange for the managers/servicers of those MBS mortgages to carry out their desired policy.
Participant[quote=davelj][quote=analyst][quote=Rich Toscano][quote=analyst]
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:
http://piggington.com/shadow_inventory_the_flood_that_may_never_come#comment-117626
Rich[/quote]
Check the dates.
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?
Participant[quote=davelj][quote=analyst][quote=Rich Toscano][quote=analyst]
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:
http://piggington.com/shadow_inventory_the_flood_that_may_never_come#comment-117626
Rich[/quote]
Check the dates.
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?
Participant[quote=davelj][quote=analyst][quote=Rich Toscano][quote=analyst]
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:
http://piggington.com/shadow_inventory_the_flood_that_may_never_come#comment-117626
Rich[/quote]
Check the dates.
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?
Participant[quote=davelj][quote=analyst][quote=Rich Toscano][quote=analyst]
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:
http://piggington.com/shadow_inventory_the_flood_that_may_never_come#comment-117626
Rich[/quote]
Check the dates.
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?
Participant[quote=davelj][quote=analyst][quote=Rich Toscano][quote=analyst]
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:
http://piggington.com/shadow_inventory_the_flood_that_may_never_come#comment-117626
Rich[/quote]
Check the dates.
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?
Participant[quote=SD Realtor]
Analyst you wrote alot of what we already know and have posted.
[/quote]
Some of the “we” demonstrate they are following closely and understand. Others continue to demonstrate otherwise. My involvement in the current stream started with a specific response to a poster who seemed disbelieving that lenders would hold back from the market.
[quote=SD Realtor] Of course all bets are off, until the govt returns to fiscal discipline and no it is not an indefinite shell game. Come on though, do you honestly see our govt doing that on its own?
[/quote]
I don’t believe that I have predicted the degree to which the federal government will or will not adopt monetary and fiscal discipline. If it does, it will be due to pressure arising from outside the housing market.
The reason I read and participate here is to aid in my own decision-making. I have lived in San Diego for 40 years, have reached a plausible retirement age, and own San Diego property without debt.
To make the choice whether to hold or sell, I have to predict the market. To do that, I have to understand as much as possible what feeds both the supply and demand side. I think I have achieved the level of understanding that is possible.
My conclusion is that without the government intervention, the market would move enough lower that I should sell and come back later.
Since I have not yet sold, it is clear that I have not yet concluded that the government will be forced to back off significantly.
Participant[quote=SD Realtor]
Analyst you wrote alot of what we already know and have posted.
[/quote]
Some of the “we” demonstrate they are following closely and understand. Others continue to demonstrate otherwise. My involvement in the current stream started with a specific response to a poster who seemed disbelieving that lenders would hold back from the market.
[quote=SD Realtor] Of course all bets are off, until the govt returns to fiscal discipline and no it is not an indefinite shell game. Come on though, do you honestly see our govt doing that on its own?
[/quote]
I don’t believe that I have predicted the degree to which the federal government will or will not adopt monetary and fiscal discipline. If it does, it will be due to pressure arising from outside the housing market.
The reason I read and participate here is to aid in my own decision-making. I have lived in San Diego for 40 years, have reached a plausible retirement age, and own San Diego property without debt.
To make the choice whether to hold or sell, I have to predict the market. To do that, I have to understand as much as possible what feeds both the supply and demand side. I think I have achieved the level of understanding that is possible.
My conclusion is that without the government intervention, the market would move enough lower that I should sell and come back later.
Since I have not yet sold, it is clear that I have not yet concluded that the government will be forced to back off significantly.
Participant[quote=SD Realtor]
Analyst you wrote alot of what we already know and have posted.
[/quote]
Some of the “we” demonstrate they are following closely and understand. Others continue to demonstrate otherwise. My involvement in the current stream started with a specific response to a poster who seemed disbelieving that lenders would hold back from the market.
[quote=SD Realtor] Of course all bets are off, until the govt returns to fiscal discipline and no it is not an indefinite shell game. Come on though, do you honestly see our govt doing that on its own?
[/quote]
I don’t believe that I have predicted the degree to which the federal government will or will not adopt monetary and fiscal discipline. If it does, it will be due to pressure arising from outside the housing market.
The reason I read and participate here is to aid in my own decision-making. I have lived in San Diego for 40 years, have reached a plausible retirement age, and own San Diego property without debt.
To make the choice whether to hold or sell, I have to predict the market. To do that, I have to understand as much as possible what feeds both the supply and demand side. I think I have achieved the level of understanding that is possible.
My conclusion is that without the government intervention, the market would move enough lower that I should sell and come back later.
Since I have not yet sold, it is clear that I have not yet concluded that the government will be forced to back off significantly.
Participant[quote=SD Realtor]
Analyst you wrote alot of what we already know and have posted.
[/quote]
Some of the “we” demonstrate they are following closely and understand. Others continue to demonstrate otherwise. My involvement in the current stream started with a specific response to a poster who seemed disbelieving that lenders would hold back from the market.
[quote=SD Realtor] Of course all bets are off, until the govt returns to fiscal discipline and no it is not an indefinite shell game. Come on though, do you honestly see our govt doing that on its own?
[/quote]
I don’t believe that I have predicted the degree to which the federal government will or will not adopt monetary and fiscal discipline. If it does, it will be due to pressure arising from outside the housing market.
The reason I read and participate here is to aid in my own decision-making. I have lived in San Diego for 40 years, have reached a plausible retirement age, and own San Diego property without debt.
To make the choice whether to hold or sell, I have to predict the market. To do that, I have to understand as much as possible what feeds both the supply and demand side. I think I have achieved the level of understanding that is possible.
My conclusion is that without the government intervention, the market would move enough lower that I should sell and come back later.
Since I have not yet sold, it is clear that I have not yet concluded that the government will be forced to back off significantly.
Participant[quote=SD Realtor]
Analyst you wrote alot of what we already know and have posted.
[/quote]
Some of the “we” demonstrate they are following closely and understand. Others continue to demonstrate otherwise. My involvement in the current stream started with a specific response to a poster who seemed disbelieving that lenders would hold back from the market.
[quote=SD Realtor] Of course all bets are off, until the govt returns to fiscal discipline and no it is not an indefinite shell game. Come on though, do you honestly see our govt doing that on its own?
[/quote]
I don’t believe that I have predicted the degree to which the federal government will or will not adopt monetary and fiscal discipline. If it does, it will be due to pressure arising from outside the housing market.
The reason I read and participate here is to aid in my own decision-making. I have lived in San Diego for 40 years, have reached a plausible retirement age, and own San Diego property without debt.
To make the choice whether to hold or sell, I have to predict the market. To do that, I have to understand as much as possible what feeds both the supply and demand side. I think I have achieved the level of understanding that is possible.
My conclusion is that without the government intervention, the market would move enough lower that I should sell and come back later.
Since I have not yet sold, it is clear that I have not yet concluded that the government will be forced to back off significantly.
-
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