The media continues to make announcements of foreclosures, hard times and victims of the mortgage crisis. Some citizens publicly and privately express anger who have invested responsibly of the unfairness of the mortgage bailout. It would be easier to form an opinion if we had a better grasp of the situation. What percentage of home loans are defaulting and to what capacity compared to historic defaults? No one seems to be talking about that. Who’s responsible for all those sub prime loans? Who’s really the “dirty bird?”
Firstly, banks aren’t broke. There’s an accounting system called “mark to market” that isn’t widely talked about. The sky is not falling and the FDIC has access to insurance funds.
“Mark-to-Market” Accounting and the Origins of the Financial Crisis: Mark-to-market accounting (also known as “fair value” accounting) means that companies must value the assets on their balance sheets based on the latest market indicators of the price that those assets could be sold for immediately. Under such a rule, declining housing prices don’t just reduce the value of defaulting mortgages. They reduce the value of all mortgages and all mortgage-related securities because the housing collateral protecting them is worth less.
“Sub Prime Mortgage” is a type of loan granted to people with poor credit histories.
In the OTS disclosure of mortgage loan data, 35 percent of mortgages modified in the second quarter of 2008 had become 60 days or more past due within 5 months of modification. That’s important to know when we’re at the crossroads of spending all that time and money refinancing all those “victims.” See end of article for OTS links.
Excerpts of a New York Times article published in 1999 …In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
…Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
…the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
…In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Read the entire article here.
In a public announcement this week, Sheila Blair, head of the Federal Deposit Insurance Corporation (FDIC) warned bank chief executives that raised assessment fees–in addition to a new “emergency” fee–were critical to keep the insurance fund solvent. Thus… the sky is falling in an effort to charge more “fees” without too much fuss and no doubt those “fees” will be passed on to the consumer, YOU.
“Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative,” she wrote.
What the media isn’t telling you is that last month John Bovenzi, chief operating officer (COO) of the Federal Deposit Insurance Corp (FDIC), asked Congress for authority to impose special fees on banks for “a range of entities.” He stood before the Federal Committee on Financial Services and made a speech entitled “Promoting Bank Liquidity and Lending Through Deposit Insurance, Hope for Homeowners, and Other Enhancements.” Read it here.
Bovenzi said it would impose the assessment on banks that take insured deposits, those banks’ holding companies, or both, as the FDIC sees fit.
He asked that Congress more than triple its existing line of credit with Treasury to $100 billion from $30 billion.
Bovenzi said that if Congress goes forward with permanently increasing the level of deposit insurance from $100,000 to $250,000, the FDIC should also be able to charge banks increased fees against the increased coverage. Rep. Barney Frank is currently working on a bill to make the FDIC coverage permanent at $250,000.
Steve Forbes, Forbes Inc Chief Executive wrote in a recent WSJ opinion column, “The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or ‘fair value’ accounting for banks, insurance companies and other financial institutions.”
Under mark-to-market — the revaluation of assets to their current market value — even non-suspect assets are being artificially knocked down in value, Forbes wrote.
“Banks and life insurance companies that have positive cash flows now find themselves in a death spiral,” Forbes wrote.
Forbes said that of the more than $700 billion that financial institutions had written off, almost all of it had been book write downs, not actual cash losses. Read more here
Chief economist Brian S. Wesbury and his colleagle Bob Stein at Trust Portfolios of Chicago estimate the impact of the “mark-to-market” accounting rule on the current crisis as follows:
“It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market. What’s most fascinating is that the Treasury is selling its plan as a way to put a bottom in mortgage pool prices, tipping its hat to the problem of mark-to-market accounting without acknowledging it. It is a real shame that there is so little discussion of this reality.” (Emphasis added.)
If regulators on their own–or Congress, if regulators fail to use their discretion–can fix 70% of the financial crisis by changing the mark-to-market accounting rule, we should change the rule first before attempting to pass another reevaluated bailout package. Read more here
Who is the OTS? The Office of Thrift Supervision is an agency of the US Dept. of the Treasury
Office of Thrift Supervision (OTS) homepage
OTS Disclosure of mortgage loan data, third quarter 2008
OTS Disclosure of mortgage loan data, October 2007 to March 2008
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