The New Bail Out Package

[texaspackerbacker]

Well, the bigwigs of both parties didn't wait long--barely even taking Yom Kippur off--to retool their effort to hoodwink the American people.

What I heard at first sounded bad--no substantial improvements, just a few bones thrown to House Dems, 93 or 94 of whom voted against the first package. They are making a big deal about raising the limit per account of FDIC protection from $100,000 to $250,000. While a worthwhile move, this would not make any substantial difference in the mortgage "crisis" or the dubious benefit of the $700 billion bail out.

One very positive thing I heard, however, that if true, could make a MAJOR difference is the ending of the MARK TO MARKET accounting practice which created a huge artificial devaluing of mortgage portfolios. To a great extent, this is clsoing the gate after the horse got out. However, it should go a long way toward preventing similar problems in the future and maybe even hasten the recovery as the securities backed by mortgages instantly are assigned a paper value much more in line with the real intrinsic value.

I'm withholding judgment at this point on the new package. The best indicator, however, will be the conclusions of those in Washington most in tune with the values of the people, as well as what will and will not ultimately be beneficial to the people, the House Republicans.

[retailguy]

One very positive thing I heard, however, that if true, could make a MAJOR difference is the ending of the MARK TO MARKET accounting practice which created a huge artificial devaluing of mortgage portfolios. To a great extent, this is clsoing the gate after the horse got out. However, it should go a long way toward preventing similar problems in the future and maybe even hasten the recovery as the securities backed by mortgages instantly are assigned a paper value much more in line with the real intrinsic value.

I don't agree with your assessment here Tex. The Mark to Market accounting piece is an important part of assigning a "fair value" to assets on a company balance sheet. It is is requirement under IFRS & US GAAP (FAS #157). Mark to Market focuses on the best predictible current value of the asset based upon forward curves (typically) and tries to predict which way the market is moving leading to a more accurate assessment of the fair value of an asset.

These "devaluing" of assets was in a large way warranted based on what happened to the mortgage market. Ignoring this component could potentially overstate the value of the assets subject to fair value.

While I'll grant that this method is inaccurate at best in markets during extreme volatility, exempting it will lead to other inaccuracies in it's own right. Besides, the markets traditionally haven't operated in the extreme volatility that we've seen in the past year or so, which would lead a reasonable person to believe that the volatility is temporary.

Trying to stabilize things during periods of volatility is one thing, exempting part of the equation is yet another thing, and will lead to purposely inaccurate numbers.

This is not as "positive" as you've been led to believe. It has been entertaining in a sad way for me to listen to broadcasters attempt to explain a concept that they don't understand. There is a lot of mis-information out there right now.

This whole thing is a complete klusterfuck. On both sides of the aisle. There are so many chicken littles running around you can't keep track of them all.

[texaspackerbacker]

Correct me if I'm wrong, retailguy, but doesn't "mark to market" take these clusters of mortgages backing mortgage securities, and value ALL of them at the percentage of face value of the worst of them. Several supporters of the bail out even have stated that these mortgage securities are greatly undervalued due to "mark to market", very much inhibiting the ability of holders of these securities to borrow funds, while at the same time, increasing their need for funds to maintain the same percentage of reserves with their artificially devalued assets.

So far, this ending of the "mark to market" thing is the only redeeming quality I've seen in this new bail out package.

[Tyrone Bigguns]

Tex with another strong showing in the Judeo portion of Judeo Christian.

[texaspackerbacker]

Tex with another strong showing in the Judeo portion of Judeo Christian.

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[BallHawk]

Tex with another strong showing in the Judeo portion of Judeo Christian.

Barney Frank, he's our man! If he can't do it no one can!

[retailguy]

Correct me if I'm wrong, retailguy, but doesn't "mark to market" take these clusters of mortgages backing mortgage securities, and value ALL of them at the percentage of face value of the worst of them. Several supporters of the bail out even have stated that these mortgage securities are greatly undervalued due to "mark to market", very much inhibiting the ability of holders of these securities to borrow funds, while at the same time, increasing their need for funds to maintain the same percentage of reserves with their artificially devalued assets.

So far, this ending of the "mark to market" thing is the only redeeming quality I've seen in this new bail out package.

Yes and no.

Yes, the mortgage assets should be valued in a "pool" of similar mortgages. But I disagree that mark to market is the reason that these pools are 'valued' poorly.

Simply put, the mortgage industry has been making "bad" loans for years. they moved away from standard 20% down policies and inherently took more and more risk. Then when housing prices fell, their loans got riskier and riskier and THAT is what devalued the portfolios. They really are worth less. It's not mark to market accounting that made them worth less. It just exposed it.

The risky parts of the portfolio have made the assets illiquid. The regulatory requirements are in place to protect the FDIC and taxpayers. Saying that mortgages are worth less in this economy is common sense. THEY ARE WORTH LESS. Why? The risk is higher. The risk the bank willingly took when it loaned money with less equity.

So, what happens when we suspend mark to market? Simple, we don't have to try to find "pricing trends" to value the mortgages. We don't have to look at the fact that the market is illiquid because there is a bunch of junk in it. It is a pink elephant if you ask me.

[Tyrone Bigguns]

Tex with another strong showing in the Judeo portion of Judeo Christian.

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You prove my point again.

[texaspackerbacker]

Correct me if I'm wrong, retailguy, but doesn't "mark to market" take these clusters of mortgages backing mortgage securities, and value ALL of them at the percentage of face value of the worst of them. Several supporters of the bail out even have stated that these mortgage securities are greatly undervalued due to "mark to market", very much inhibiting the ability of holders of these securities to borrow funds, while at the same time, increasing their need for funds to maintain the same percentage of reserves with their artificially devalued assets.

So far, this ending of the "mark to market" thing is the only redeeming quality I've seen in this new bail out package.

Yes and no.

an Yes, the mortgage assets should be valued in a "pool" of similar mortgages. But I disagree that mark to market is the reason that these pools are 'valued' poorly.

Simply put, the mortgage industry has been making "bad" loans for years. they moved away from standard 20% down policies and inherently took more and more risk. Then when housing prices fell, their loans got riskier and riskier and THAT is what devalued the portfolios. They really are worth less. It's not mark to market accounting that made them worth less. It just exposed it.

The risky parts of the portfolio have made the assets illiquid. The regulatory requirements are in place to protect the FDIC and taxpayers. Saying that mortgages are worth less in this economy is common sense. THEY ARE WORTH LESS. Why? The risk is higher. The risk the bank willingly took when it loaned money with less equity.

So, what happens when we suspend mark to market? Simple, we don't have to try to find "pricing trends" to value the mortgages. We don't have to look at the fact that the market is illiquid because there is a bunch of junk in it. It is a pink elephant if you ask me.

I was in real estate for 18 years, selling literally hundreds of properties. And in that whole time, I sold zero nada zilch properties that 20% down was required. You could count on one hand how many conventional mortgages at all were used among those hundreds, and even those were 10% down. Most of what I sold were VA 100% financing--admittedly an inordinate percentage of those because I'm in a military area--and FHA with 3-5% down. The FHA mortgages were the rule all over the country.

If you have a cluster of let's say 50 mortgages backing a mortgage security, and let's say 3 of those are in default--I would suggest even that is unrealistically high percentage-wise--and maybe 1 or 2 of those mortgages are secured by property valued at drastically less than the face value of the mortgage.With "mark to market", ALL of those 50 mortgages in the cluster would have to be valued for accounting purposes at the percentage of real value to face value of those 1 or 2 "toxic assets". Is that somehow defensible to you?

HOW can those mortgages possibly be considered "worthless" when the bottom line is that the mortgage holder can get ownership of the property--if there is default--EVEN IF THAT PROPERTY IS ONLY WORTH HALF OR 2/3 WHAT IT WAS WORTH WHEN THE MORTGAGE WAS MADE? There STILL is value. That's just undeniable.

[texaspackerbacker]

Tex with another strong showing in the Judeo portion of Judeo Christian.

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You prove my point again.

Tyrone, WHAT are you trying to say? Are you implying the tired old stereotype of a conspiracy of Jewish bankers?

Is Barney Frank Jewish? If he is, I didn't even know that. His claim to fame is that he is a God damned FLAMING FAG--which despicable as it is, I suppose is irrelevant to this discussion.

If you've got something to say, spit it out!

[retailguy]

With "mark to market", ALL of those 50 mortgages in the cluster would have to be valued for accounting purposes at the percentage of real value to face value of those 1 or 2 "toxic assets". Is that somehow defensible to you?

HOW can those mortgages possibly be considered "worthless" when the bottom line is that the mortgage holder can get ownership of the property--if there is default--EVEN IF THAT PROPERTY IS ONLY WORTH HALF OR 2/3 WHAT IT WAS WORTH WHEN THE MORTGAGE WAS MADE? There STILL is value. That's just undeniable.

The mortgages are not considered "worthless". Their value has been "devalued" from face value. As it should be.

Your anecdotal experience illustrates PERFECTLY what I'm talking about. The fact that few put down 20% into the purchase of a home illustrates quite clearly what I'm talking about. This is all about RISK. It is undeniable that when the borrower is under capitalized the bank (lender) takes more risk.

For the past 30 years, home values have increased. Many people have NEVER experienced a down market before. Now there is one, and the banks find themselves overextended because of crummy loan decisions over the past many years.

Don't bring VA or FHA into this. The model doesn't work, as those mortgages are INSURED. The federal insurance removes the risk. Leave your discussions surrounding mortgages to those that have increased risk.

Those mortgages SHOULD be devalued. People are finally seeing the RISK that the lender has assumed. If I put 5% down on the purchase of a home, and prices fall by 15%, guess who has the "risk" of loss? The lender. If I had put 20% into the home and prices fall by the same amount, the lender has risk, and it has increased over what it was at the time of purchase, but it's STILL LOWER than the 1st case. Lower risk transfers to higher fair value.

Tex, you proved my point. Eliminating mark to market will NOT be the "panacea" fix that you think it will be. Will it help? Sure. It'll keep some "reality" out of the financials. That lack of reality will not trigger larger margin calls and deposit requirements for the banks leaving them cash to operate.

Everything's fine, right? Not exactly. The banks are now, in reality, underfunded and the risk to the FED for default is now higher. This puts a larger strain on the FDIC insurance, and leaves the plan underfunded in the event of failure.

You can paint this anyway that you like Tex, but the reality is that our "normal" mortgage programs have much higher risk than we are willing to admit. That's the REAL painful issue. Mark to Market is just the scapegoat we're going to use NOT to look at the real problem. Again.

[hoosier]

Tex with another strong showing in the Judeo portion of Judeo Christian.

??????????????????

You prove my point again.

Tyrone, WHAT are you trying to say? Are you implying the tired old stereotype of a conspiracy of Jewish bankers?

Is Barney Frank Jewish? If he is, I didn't even know that. His claim to fame is that he is a God damned FLAMING FAG--which despicable as it is, I suppose is irrelevant to this discussion.

If you've got something to say, spit it out!

He's mocking your inability to distinguish the Jewish holidays. Yom Kippur hasn't happened yet this year. Try another door.

[sheepshead]

Tex with another strong showing in the Judeo portion of Judeo Christian.

Barney Frank, he's our man! If he can't do it no one can!

Larry Craig had his own package to present.

[retailguy]

Tex, one more thing. You talk about the "fallacy" of mortgages being valued in "pools". Well mortgages are sold in pools so why shouldn't they be valued that way?

Yes, some mortgages are being unfairly devalued, but others, are being unfairly overvalued. If you look at the pool as a whole, the value is probably pretty close to correct. Just because a home doesn't foreclose, doesn't mean that there is no risk. The risk of default is there and it's REAL.

The point is not the "pool" it's the RISK. People finally see it exists. In the long run, that's a GOOD thing.

[texaspackerbacker]

Tex, one more thing. You talk about the "fallacy" of mortgages being valued in "pools". Well mortgages are sold in pools so why shouldn't they be valued that way?

Yes, some mortgages are being unfairly devalued, but others, are being unfairly overvalued. If you look at the pool as a whole, the value is probably pretty close to correct. Just because a home doesn't foreclose, doesn't mean that there is no risk. The risk of default is there and it's REAL.

The point is not the "pool" it's the RISK. People finally see it exists. In the long run, that's a GOOD thing.

If it is an average value in the pool, where a bad one or two knock down the average, that's fine--that's mathematically sound. But to take the few rare exceptions, and pretend that's the norm--by artificially valuing on paper ALL the mortgages in the pool at the low value of the rotten ones, that's just wrong. How can you claim otherwise?

And yes, the risk of default is there and real. However, other than in a deflated real estate market, there is no stigma at all for mortgage holders to end up foreclosing and owning the property. And even in the down market that a few areas of the country are seeing these days, those foreclosed properties stiill have half, maybe 2/3, or whatever value.

THAT is why I claim that this whole mess is a contrived crisis. There just aren't that big a portion of all mortgages that are "bad"--defaulted, foreclosed, whatever, and even a large portion of those are secured by property as valuable as the face of the mortgage note--and even the ones that aren't are secured by properties that have some decent percentage of face value. Could you possibly disagree with that?

[texaspackerbacker]

Tex with another strong showing in the Judeo portion of Judeo Christian.

??????????????????

You prove my point again.

Tyrone, WHAT are you trying to say? Are you implying the tired old stereotype of a conspiracy of Jewish bankers?

Is Barney Frank Jewish? If he is, I didn't even know that. His claim to fame is that he is a God damned FLAMING FAG--which despicable as it is, I suppose is irrelevant to this discussion.

If you've got something to say, spit it out!

He's mocking your inability to distinguish the Jewish holidays. Yom Kippur hasn't happened yet this year. Try another door.

OK, so it's Rosh Hashanah. Yom Kippur isn't until Oct. 9. I knew it sometime around now. Happy New Year to all the Jews out there.

Seriously, atheist scum leftists like Tyrone don't have any respect for Jews any more than they do for Christians. The trend in recent years is for Jews--traditionally a Dem/lib constituency--to know which side considers Israel a valuable ally and partner, and which side disrespects Israel--treating it as morally equivalent to our/their terrorist Muslim enemies. Consequently, an increasing portion of the Jewish population has voted for the pro-American candidates.

[bobblehead]

Both methods are wrong. A security should be revalued based on the percentage of default. If you have 100 securities and on average 7% of them go bust it should be revalued at 93% of NPV. Not 100% which is what we just changed to, and not 50% because nobody is buying them so the "value at market" is extremely low. The realized return will be 93% if it is held and THAT is the number they should be revalued at. The lesser of two evils right now with nobody wanting to buy mortgage backed securites (thus no market) is to drop it. Mark to market is wrong, but so is holding it on the books at full value. This is the best of my knowledge, but not my area of knowledge, so correct me if I'm wrong. I haven't read any detailed things about this.

[retailguy]

Tex, one more thing. You talk about the "fallacy" of mortgages being valued in "pools". Well mortgages are sold in pools so why shouldn't they be valued that way?

Yes, some mortgages are being unfairly devalued, but others, are being unfairly overvalued. If you look at the pool as a whole, the value is probably pretty close to correct. Just because a home doesn't foreclose, doesn't mean that there is no risk. The risk of default is there and it's REAL.

The point is not the "pool" it's the RISK. People finally see it exists. In the long run, that's a GOOD thing.

If it is an average value in the pool, where a bad one or two knock down the average, that's fine--that's mathematically sound. But to take the few rare exceptions, and pretend that's the norm--by artificially valuing on paper ALL the mortgages in the pool at the low value of the rotten ones, that's just wrong. How can you claim otherwise?

And yes, the risk of default is there and real. However, other than in a deflated real estate market, there is no stigma at all for mortgage holders to end up foreclosing and owning the property. And even in the down market that a few areas of the country are seeing these days, those foreclosed properties stiill have half, maybe 2/3, or whatever value.

THAT is why I claim that this whole mess is a contrived crisis. There just aren't that big a portion of all mortgages that are "bad"--defaulted, foreclosed, whatever, and even a large portion of those are secured by property as valuable as the face of the mortgage note--and even the ones that aren't are secured by properties that have some decent percentage of face value. Could you possibly disagree with that?

Tex, the whole premis of your argument is based on "one or two" mortgages in the pool are bad. This IS NOT accurate. One or two are currently in foreclosure. Many more homeowners are struggling, making late payments, have the home up for sale, or are over extended.

Your analysis ignores the risk of THOSE loans. Those loans SHOULD be devalued. I could make a case that EVERY SINGLE MORTGAGE, that has less than 20% equity in the secured asset is AT RISK and as such should be devalued over normal paper value. That encompasses MOST of the mortgages in the pool, not one or two.

Tex, you need to research and read about risk. You're "technically" accurate with regard to the "current" problem level, but you are not valuing these assets appropriately in your mind. You've left out some of the variables that determine worth, just as the Congress is doing.

[retailguy]

Both methods are wrong. A security should be revalued based on the percentage of default. If you have 100 securities and on average 7% of them go bust it should be revalued at 93% of NPV. Not 100% which is what we just changed to, and not 50% because nobody is buying them so the "value at market" is extremely low. The realized return will be 93% if it is held and THAT is the number they should be revalued at. The lesser of two evils right now with nobody wanting to buy mortgage backed securites (thus no market) is to drop it. Mark to market is wrong, but so is holding it on the books at full value. This is the best of my knowledge, but not my area of knowledge, so correct me if I'm wrong. I haven't read any detailed things about this.

Again, risk of failure is NOT the only risk. Risk of devaluation of the asset, risk of late payment, etc are part of the equation.

You cannot leave out the value of risk. You distort the picture. If an at risk homeowner doesn't fail, and somehow pulls up his bootstraps and makes the payment and pays off the home, then, at the end of the day, the paper was NOT worth the value of the loan. It was worth less, and there was a PREMIUM earned that compensates the lender for holding the additional risk over the identical loan held by his neighbor.

Valuing the mortgage at anything less than fair value distorts the picture.

[HowardRoark]

Both methods are wrong. A security should be revalued based on the percentage of default. If you have 100 securities and on average 7% of them go bust it should be revalued at 93% of NPV. Not 100% which is what we just changed to, and not 50% because nobody is buying them so the "value at market" is extremely low. The realized return will be 93% if it is held and THAT is the number they should be revalued at. The lesser of two evils right now with nobody wanting to buy mortgage backed securites (thus no market) is to drop it. Mark to market is wrong, but so is holding it on the books at full value. This is the best of my knowledge, but not my area of knowledge, so correct me if I'm wrong. I haven't read any detailed things about this.

Again, risk of failure is NOT the only risk. Risk of devaluation of the asset, risk of late payment, etc are part of the equation.

You cannot leave out the value of risk. You distort the picture. If an at risk homeowner doesn't fail, and somehow pulls up his bootstraps and makes the payment and pays off the home, then, at the end of the day, the paper was NOT worth the value of the loan. It was worth less, and there was a PREMIUM earned that compensates the lender for holding the additional risk over the identical loan held by his neighbor.

Valuing the mortgage at anything less than fair value distorts the picture.

Plus, the math on these things is such that they assume prepayment of mortgages...early payoffs. This is no longer going to happen for many reasons. The math is VERY complex in valuing these things.