Heath's Blog


Is "Mark To Market" why they aren't lending?

It seems that because of Mark to Market, some of the bail out money given to banks has only helped re-balance their out of balance ratios.  They still can't make new loans because that would cause their ratios to move out of balance again.  The ratios I am speaking of are the deposits to loans ratios every bank is required to maintain.  Those ratios are for banks like the old 28/36 ratios were in the old days for buying real estate.  Less than 28/36 meant you were a buyer.  29/37 meant you were out of balance.

Simply put, "Mark To Market" is an accounting method that became law.  It ended up affecting banks in ways that had not been carefully thought through.  "Mark to Market" is a value accounting of assets based on the Market value at a given time.  It does not allow for a cash flow value, or any other type of valuation.  It is only a measure of value based on a point in time.  So the problem with that is...?

It seems that the intent of the law wasto make everyone account for value the same way.  What it didn't foresee was that when a big move happened either way, all values were affected.  When some went up, they all went up.  When some went down they all went down.  If this was done in real estate, all the values on one street would be the value of the last sale on the street.  If someone was willing to pay more than the last sale, all the values would be changed upward.  If someone had to sell and sold below the last sale price, every the price would go down.  There would be no consideration for location, condition, style, gross rents, etc..

The problem with that is, the point in time is not necessarily a correct measure, but the law does not allow for alternatives.  When values of some assets of began to fall, all were affected.  This made every company revalue their assets, even if their own assets were stronger than those causing the change.  All companies lost value, even if their portfolio was solid.

Why did this law come into being?  Because before it existed, some accountants were playing fast and loose with asset values in companies like Enron.  So lawmakers were trying to reign in the accountants and investments businesses to close those fast and loose loopholes. 

The way I understand it is, Company B has B grade assets.  Company A has A grade assets.  B company, that held a more risky asset package, had to sell at a fire sale prices because some of their assets started to default.  According to law, Company A had to reduce the value of their assets correspondingly, because of B company's fire sale.  The accounting laws made all values directly dependent on each other, rather than dependent on the individual make up of the assets relative to normal valuation methods of the past like cash flow, condition, location, etc.. 

Banks had to start "Mark To Market" their loan portfolios.  As some loan groups started to fall, the Mark to Market affects caused the ratios of otherwise solvent banks to be outside of approved levels, even when their assets were stronger.  That made stocks fall, which caused more distress, and then another Mark to Market, and more distress...

So when then the govt handed out money to increase some banks' ratios, those funds weren't lendable.  If the bank made loans with those new funds, their ratios get out of whack again.  So maybe the Mark To Market law/rule/procedure needs to get fixed.  But, we all know how fast things move in the law making arena.  It may be a way to free up some lenders.

Happy listing and selling!

Heath Coker, Associate Broker
Robert Paul Properties
www.CapeGroup.com / capegroup@capegroup.com
508-274-5613  Licensed in MA
Its a beautiful day on Cape Cod!
@CapeGroup  Skype: heath.coker

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Heath I think a big piece of it comes from the fact that the big banks really dont know how healthy their portfolios are and are hoarding cash. Not on our side, but more of a macro side.  The big business credit lines are the ones that are feeling this pain while we have more than enough to lend on the residential side.  There is cash, they are just afraid of what might go bad next to cause liquidity issues.

Posted by Robert Rauf (HomeBridge Financial Services (NJ)) over 11 years ago

I think many banks are still trying to figure out where they'll be if the rate of commercial loan defaults, credit card defaults, and Alt-A resets further drains their resources.  Banking is still a mess and will be for some time.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 11 years ago

The health of their portfolios from the onlookers is still goverend by the MtM.  If the commercial etc become problematic, then the MtM distress starts all over again.  MtM needs a fix'n.

Posted by Associate Broker Falmouth MA Cape Cod Heath Coker, Heath Coker Robert Paul Properties Falmouth MA (http://www.CapeGroup.com & http://www.REindex.com) over 11 years ago

Hi Heath: Thanks for the information - you learn something new every day!


Posted by Matt Listro, Your Credit Repair Expert (National Credit Fixers - Matt Listro) over 11 years ago

Nice post Heath,

  Marked to Market is not fairing so well, but Marked to Model definitely did not work either.  I still cannot for the life of me figure out how they do not go by the simple concept of garbage in, garbage out.  Or how do these company executives get huge bonuses when they are losing so much of the company's money?  If I had an employee losing my company money, they would be lucky if fired was all that I did to them.  Overall, I think that the accounting used in all of this is a joke and that it's almost too big of a problem to ever fix without coming up with a new ponzi scheme of monopoly money.

Posted by Khash Saghafi NMLS, Mortgage Loan Officer, Cleveland OH NMLS 1114762 (Liberty Home Mortgage Corporation) over 11 years ago

How about not using new grads to value the MBSs when they have no experience and are only reading a manual and checking boxes?  So many aspects of this problem....

Posted by Associate Broker Falmouth MA Cape Cod Heath Coker, Heath Coker Robert Paul Properties Falmouth MA (http://www.CapeGroup.com & http://www.REindex.com) over 11 years ago