Replies

If the rule is canceled, how will the assets be remarked?

The problem with mark to market is it forces banks to value real estate/properties based on what someone says those properties are worth at this exact current moment ... today.... when in fact many banks plan on keeping those mortgage investments for years or decades (or until maturity)

I saw a reasonable proposal that would allow banks to categorize their assets into two groups: ones they are going to keep for long term (10 years or until maturity) ---- and those which could be resold.

The bank would be required to declare legally whether or not they intended to keep properties to maturity (with penalties if they didn't)

Thus if the market today is lousy, the bank would not be forced to write down the value based on today's lousy market.

Many of these devalued assets in fact are still viable properties, where the 'owner' is making on-time payments and being responsible.

Also there is another proposal (I think) that would limit the downside accounting to 5% a year (or something like that) so as to prevent banks from having to go from 100% to 0% all at once.

Bottom line: it is extremely unlikely that real estate will drop in value forever, and thus why force these banks to value long term properties that way.

Be careful to distinguish between "REO", real estate owned by the banks through foreclosure, and mortgage assets they hold in the form of mortgage loans or securities representing pools of mortgages.

In the case of REO, banks are not built to hold homes long-term, they are looking to re-sell them and thus the book value needs to reflect the current market value. However, REO is a very small piece of banks' balance sheets, as banks will sell them off quickly, even at big losses.

In the case of mortgage loans or securities, why mark to market? Banks are not built to hold on to loans for 15 to 30 years, they fund themselves via short-term deposits or time deposits or borrowing of maybe up to 7 years, 10 years tops. They can pay off their deposits or debts when due by selling off the assets, or re-financing and getting new or renewed deposits. When that is in doubt, there is no assurance they can pay off the creditors.

That is where government steps in, by assuring depositors and creditors. Having done this, it does make sense to free banks from mark to market, which is reducing their capital and thus lending capacity, and allow banks to value mortgage loans and securites based on their repayment performance. The question is, what interest rate do you use to calculate the value of that future repayment stream? Again, the government sets the mark, which it will do by lending $6 dollars for every $1 of equity to buy distressed assets.