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Mark-to-Market (MTM) Investigation

Posted by CM on August 11, 2009


By Coleen Martinez

First, let’s begin our discussion with an explanation of what Mark-to-Market (MTM) is.  From the Forbes website, Investopedia, MTM is the following1:

  1. A measure of the fair value of accounts that can change over time, such as assets and liabilities.  MTM aims to provide a realistic appraisal of an institution’s or company’s current financial situation. 
  2. The accounting act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value. 
  3. When the net asset value (NAV) of a mutual fund is valued based on the most current market valuation.

The Forbes’ website goes on to try to explain what happens in a MTM situation.  Take the “financial crisis of 2008/20091” (as if this crisis is ancient history) as the starting point of the following explanation.  So, as we all know, banks went around the country selling and buying lots of bad loans on houses with inflated prices.  And when the bubble burst, the loans that the banks were holding lost their value and in consequence, the banks themselves lost their value.  Forbes explains the above situation as this:

                 “Problems can arise when the market-based measurement does not accurately reflect the underlying asset’s true value. This can occur when a company is forced to calculate the selling price of these assets or liabilities during unfavorable or volatile times, such as a financial crisis. For example, if the liquidity is low or investors are fearful, the current selling price of a bank’s assets could be much lower than the actual value. The result would be a lowered shareholders’ equity.1

The bank bought loans for inflated values.  In turn, the bank sold shares based on the inflated values of the loans and ultimately marketed itself at an inflated price to have investors buy shares of their company so everyone could be happy and rich.   When the bubble burst, the bank would have lost its’ value because the loans lost their values, and ultimately the shareholders would lose the value of their high priced stock in the bank. 

What the Forbes quote above is trying to explain is that during a financial crisis, banks with bad loans will appear worse than they appear.  So to combat this awful situation for the banks, the MTM rule was kicked to the curb.  In April 2009, the Financial Accounting Standards Board (FASB) created “new guidelines that would allow for the valuation to be based on a price that would be received in an orderly market rather than a forced liquidation.1

Based on the financial industry’s faulty logic, they have concluded that during a financial crisis, they are allowed to value their assets at a price of their desire.  When doing this “magic math” banks will not lose shareholders because their only value is based on a bunch of bad loans.  Banks will instead keep all of their value and shareholders by lying about the value of their assets.  Isn’t this just fantastic!

I felt bad for not knowing about the MTM rule in the first place and not knowing about the rule’s demise in April.  I try really hard to know about current events especially when it comes to mortgage news.  Then I realized that rules disappearing and reappearing in the financial world is exactly why we had a “financial crisis of 2008/2009.1”  It seems that while President Obama is trying to put forth new regulations in the financial industry, Wall Street is still playing their games. 

I guess that you wouldn’t be surprised to know MTM is a company also.  Check them out, they offer BPO’s (Broker Price Opinions) or as we know them as, appraisals2.  I suppose that this website promises BPO’s in an “orderly market, not a forced liquidation market.1” My personal experience tells me that the BPO’s ordered for my vacant home on the market were based on a bubble market (orderly), not a reality market (forced liquidation).

While doing research for this piece, I came across a wonderfully titled opinion piece on the Forbes website titled, “Why Mark-to-Market Accounting Rules Must Die.3” The writers complain about how terrible the rule is for banks and why we should allow the financial industry to get rid of the rule.  Clearly these writers have no clue as to the affect of not having this rule does for the average citizen. 

My house has been vacant and listed for sale since February 2008.  After 6 months on the market, I started requesting approval of short sale offers.  Every single BPO we received was entirely too high and not at all reflective of the current depressed market value of my home, of the neighborhood, and of the town.  Obviously my mortgage servicer had decided early on to ignore the MTM rule and now they can ignore the MTM rule in good conscience. 

In summary, the MTM rule has been relaxed to allow banks to value their assets as they see fit.  In a financial crisis, they can keep their assets valued high even though the assets might be low.  However, in a normal market, banks have to value their assets at face value.  The financial industry’s idea of a stable market is our idea of a bubble market, whereas our idea of a stable market is the financial industry’s idea of a “forced liquidation1” market.       

We are still in a financial crisis.  Banks still won’t modify mortgages.  Obviously if banks modified mortgages they would be admitting that the values of their assets are lower than when they were first purchased.  As we have realized, this asset lowering in turn can lower the overall value of the bank.  Clearly this is why banks won’t accept short sales because they would have to admit that the loans are not as valuable as first thought.  This is why banks won’t refinance because typically the payment amount and interest will go down and thus lower the value of the loan.  This is why banks won’t modify mortgages that are underwater because again, they have to admit that the value of their loan has decreased.  Plus, by keeping an inflated value on mortgages, servicers earn ¼ to ½ percent per value of each mortgage5.  By keeping the values/mortgages/loans/assets at an inflated price, both the banks and mortgage servicers win.      

Lastly, “by allowing a property to go into foreclosure, banks have postponed the inevitable, admitting the value of their asset has decreased.4”  Take it from someone who knows, banks can drag out a pending foreclosure for a long time and all the while, they get to keep the same high value of their assets for as long as possible.  Plus, when the property does foreclose, banks and servicers earn fees5.     

I believe the MTM rule has become a joke.  Either we create a new rule or refer to the old rule and actually enforce it. 

Sources:

  1. Mark-to-Market on Investopedia, A Forbes Digital Company.  Found 8/11/09
    URL: http://www.investopedia.com/terms/m/marktomarket.asp
  2. Mark-to-Market. Found 8/11/09
    URL: www.marktomarket.com
  3. Why Mark-to-Market Accounting Rules Must Die by Brian S. Wesbury and Robert Stein.  Posted 2/24/09.  Found 8/11/09.
    URL: http://www.forbes.com/2009/02/23/mark-to-market-opinions-columnists_recovery_stimulus.html
  4. Our view on housing: On foreclosures, lenders play ‘extend and pretend’. USA Today Editorial Board.  Posted 7/28/09. Found 8/10/09
    URL:  http://blogs.usatoday.com/oped/2009/07/our-view-on-housing-on-foreclosures-lenders-play-extend-and-pretend–to-avoid-write-downs-banks-drag-feet-on.html?loc=interstitialskip
  5. AP IMPACT: Government Mortgage Partners Sued for Abuses.  Daniel Wagner.  Associated Press.  8/5/09. 
    URL: http://hosted.ap.org/dynamic/stories/U/US_MORTGAGE_MIDDLEMEN?SITE=KYB66&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2009-08-05-20-52-21
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