Mark-to-Market and Mortgages
Over the past couple of days, a new possible excuse for the recession has been coming up here and there and it’s called the mark-to-market accounting rule, and not a lot of people know what it is. I had to look it up myself, and I’ll try my best to explain what it’s about.
Mark-to-market is a system of valuating assets that requires banks to set values on them as if they were to be sold on the open market. This would seem fair at first but then, in the case of the banks that had bought those popular greed-inducing mortgage-backed securities. when the market value of these assets collapsed, so did the value of their securities, which THEN in turn caused a loss of wealth, if only on paper. The assets are still there but since the value has dropped, banks are required to report these as a loss.
So even if the banks can foreclose and such and take hold of assets held by defaulting mortgage loans. since the value of those assets have gone down, they are forced to write-down their net worth. Tragic huh?
To add more pain to the bank’s troubles, even if these mortgages are still making
a healthy profit off of these assets, the fact that the value of those houses have gone down, it doesn’t matter if the mortgage loan. new or refinanced is up to date. They have to revalue. This is true in the cases of Citigroup and the Bank of America when they were required to markdown the value of their portfolio when the housing market collapsed. This despite the fact that this as a performing portfolio that was still making them money.
So now, we have people that are arguing for and against this accounting rule. For some it means transparency in the way a business reports it’s value when for some it’s the cause of this current crisis and that by removing the need to markdown assets as if they were to be sold, banks would stabilize and money would be flowing again. Home mortgages that are still making money for the bank would now actually not hurt them simply by losing value on the asset that was linked to the original mortgage .Related posts:
Week Ahead: Government Spending to Boost Sentiment expected by Market
TARP Speculation – Mortgage Help in the Works?
Disadvantages of Reverse Mortgages