Webstarget Blog

What is Mark to Market, and why are so many “experts” saying that this is either our biggest financial problem or the way out of our current financial debaucle?

First a quick overview from Wikipedia:
In accounting and finance, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for the instrument or similar instruments. For example, the final value of a futures contract that expires in 9 months will not be known until it expires. If it is marked to market, for accounting purposes it is assigned the value that it would fetch in the open market currently.

Okay, so far so good, but what has this got to do with real estate? Everything! Real estate loans are sold and eventually bundled with other commercial paper or mortgaged backed guarantees. For the last 30 years, real estate has always gone up in value, so the current value (the mark to market) has always been lower than the real estate value that it is backed by. We think of this as “equity”.

WHY THE ROOF FELL IN
Then several years ago we allowed (even mandated) Fannie Mae and Freddie Mac to make VERY loosy goosy loans to give everyone a chance to own a home. UGH. REALTORS made out great with this . . . for awhile. Then these “sub-prime” loans that didn’t even pay on the principal started rising with the market. Owners couldn’t pay, and started foreclosing. It’s been said that for each foreclosure, 7 home loans go at risk. The more foreclosures, the less stable the market got. The banks mortgage backed securities got to be worthless in that the note amount owed was less than what the property could be sold for.

NOW THE INTERESTING PART
Because of a ruling called “Mark to Market”, the bank must be held accountable THAT DAY for the value of those securities, and if those securities are worthless, they have to value them as such and show this in their portfolio as such. Part of the definition of a bank being insolvent is having a negative net worth. Thus this is when the mother ship (Government) or larger companies (Bank of America as an example) swoop in and purchase the company for 10 cents on the dollar. “There’s profit in them thar hills”.

WHAT IF “MARK TO MARKET” WAS SUSPENDED?
Will the real estate values NEVER raise again? Many wouldn’t bet against it. They would also argue that suspending or doing away with Mark to Market would allow the market to right itself and not be forced involintarily to be taken over by hostile competitors or by the Government. And by the way, when is the last time you can think of when the Government actually ran a company or institution well, or handled our money efficiently?

THE BOTTOM LINE
Keep Mark to Market and you’re going to have Government run these companies by bailing them out and them selling off the paper (the bad paper) when the economy improves. Suspend Mark to Market and you allow the banking institutions to decide themselves whether to hold the paper to maturity or to sell the paper themselves at a discount of their choosing.

It’s an interesting concept, but I’m not hearing alot of talk about it on Capitol Hill. Somehow it seems easier to just throw money at the problem and allow the Government to bailout (yes it IS a bailout) Wall Street and play investment banker with our money.

Sincerely,

Randy Eagar, CRS
www.Webstarget.com