Mark to market?

[Pete (Premo)]

Originally Posted by somdrenter

So, when you go to trade that car in, the value of the trade in should be based on the value of your previous loan, not the value of the car?

Why are you using a car to demonstrate this? Cars are not investments, they are supposed to decline in value.

[This_person]

Originally Posted by somdrenter

So, when you go to trade that car in, the value of the trade in should be based on the value of your previous loan, not the value of the car?

I'm not sure how you would even get that.

How about, when I go to trade in, the value of the car is based on the value of the car at the time, and how much I have to pay back is based on how much I still owe? Wouldn't that make more sense?

So, if I'm NOT in the process of trying to sell my house, it's market value at the moment is really a moot point, both to me and to my mortgage provider. If I'm current on my loan, my loan is as valuable as it was the day I took it out, because the probability of the loan being repaid is based upon my ability and willingness to repay it, not based upon the daily value of the property.

If I'm paying my car loan, does the bank care whether I've trashed the back seat and made it worth less than the book value? Of course not, they only care if I'm paying. If I put in a killer radio, triple the value of the rims, buy new tires, and put on a better paintjob, the bank is not in a better position suddenly. If I drive it down gravel roads way too fast and destroy the paintjob, have my gas tank called into question by NBC News, and rip the seats the bank is not in a worse position just because my car is now worth less than it was before. The "value" of the loan is my credit, not what I borrowed against.

So, the value of a mortgage is whether it's being repaid, not what the value of the property is.

[This_person]

Originally Posted by Pete

Why are you using a car to demonstrate this? Cars are not investments, they are supposed to decline in value.

I was trying to equate the value of a loan to a bank.

Car loans are easy to understand. Mortgages are actually pretty easy to understand in the big picture.

I don't understand why the bank's value changes based upon the value of what they're loaning. The risk is whether I'll pay it back, the "insurance" is the value of the property being borrowed against. Actual "insurance" for the loan can also be bought, based upon the relative value of my credit vs. the property's value.

[Larry Gude (Premo)]

Originally Posted by This_person

I was trying to equate the value of a loan to a bank.

Car loans are easy to understand. Mortgages are actually pretty easy to understand in the big picture.

I don't understand why the bank's value changes based upon the value of what they're loaning. The risk is whether I'll pay it back, the "insurance" is the value of the property being borrowed against. Actual "insurance" for the loan can also be bought, based upon the relative value of my credit vs. the property's value.

Because, since the early 90's, everybody gets paid the BIG bucks via stocks so, the interest is in the stock price and that means attract investors and that means growth and that means all the things that look good to investors including growing assets on the balance sheet.

Since the early 90's, this is when we saw companies totally leave behind the idea of profit and loss as the benchmark for company or even product performance and the move towards asset and liability. This is when the traditional PE rations went out the window as solid investing guideline.

Mark to market worked great when you're constantly buying more and more mortgages. It gave a VERY inaccurate picture then, it does the same now.
Unless, of course, you are an investor looking for short term waves to ride and short term troughs to get off. THAT is another untold part of this story.

[Larry Gude (Premo)]

Originally Posted by Pete

Why are you using a car to demonstrate this? Cars are not investments, they are supposed to decline in value.

I think he knows that. From previous arguments about this, he likes mark to market. I'm not sure why. I still don't know why.

[somdrenter]

Originally Posted by Pete

Why are you using a car to demonstrate this? Cars are not investments, they are supposed to decline in value.

Because there is some correlation. These are not signature loans we’re talking about (for the most part). They are asset backed.

[somdrenter]

Originally Posted by This_person

I don't understand why the bank's value changes based upon the value of what they're loaning.

Well then, I’d like a $900000000000000.00 loan on a 30 year old double wide on a half acre, in the middle of a mosquito infested swamp 200 miles from any civilization

The risk is whether I'll pay it back, the "insurance" is the value of the property being borrowed against. Actual "insurance" for the loan can also be bought, based upon the relative value of my credit vs. the property's value.

And there you go. A mortgage is an asset backed loan.

[Tilted]

Best I can tell, there is some confusion on what is meant by mark to market accounting.

It refers to pricing an asset based on what you could sell that asset for in the current market - even if you have no desire, nor need, and no intention to sell it.

The alternative to that is what we refer to as mark to model accounting. That values an asset by what it means to the owner of the asset. In the simplest terms, you can think of that as book value. This valuation does not depend on there being a market for that particular asset, or on that market being liquid or 'normal'.

Some assets are 'marked to market' everyday (e.g. mutual funds, futures contracts) because their daily value can affect other dynamics (as with trading account margins). Some assets are 'marked to model', and that valuing may not be done everyday. However, the aspect which differentiates the two methodologies is not the timing of the valuations - it is the basis for the valuation. One is market based, one is more intrinsic value based, if you will.

The debate that is going on in the economic world right now is not over the timing of valuations, it is over the methodology of those valuations. Because some markets are so illiquid, and some assets are so distressed, marking them to market may yield a value that doesn't represent the real value of the assets.

The major, would-be investors in these institutions are savvy enough to understand these differences. We should just let institutions mark the assets both ways, and let investment capital make of the methodologies what they will. But, for regulatory purposes, the institutions shouldn't be bound by valuations that don't accurately represent their assets - valuations that are based on some fire sale by some other institution who's fiscal situation was much different.

About the car analogy - for the bank, the value of the asset (that is the loan) is not equal to the value of the car. It's value is based on how likely they are to get paid back, and to a much smaller degree, how much they can recoup from the vehicle, should they not get paid back. Marking that asset to market would mean valuing that loan based on what some other bank sold a similar loan for.

That would be fine, except that that other bank might have been facing bankruptcy and had to sell their loan for significantly less than what it is worth, just to address their liquidity problems (or to address regulatory requirements). Add to that the fact that most of the potential buyers of the loan are scared to buy any assets, because of the current situation and uncertainty about government actions, and its sales price doesn't necessarily fairly represent the value of the first bank's loan. Now, the problem for the first bank (which has no inclination to sell its performing loan) is that, if they apply mark to market rules, the value of their assets may drop enough to force them to sell the loan, in order to maintain what I will call 'book solvency'. You can probably see how the issue can be self-perpetuating.

[This_person]

Originally Posted by somdrenter

Well then, I’d like a $900000000000000.00 loan on a 30 year old double wide on a half acre, in the middle of a mosquito infested swamp 200 miles from any civilization

Are you credit worthy?

I don't understand your point of view here. Are you suggesting that each and every loan for each and every asset be re-evaluated on a daily, weekly monthly, quarterly, semi-annual, or annual basis? What would you do with the new car loan that is undervalued the minute the car is titled? How about a business loan for a company that is currently failing, but with the correct infusion of cash into a venture MAY be a strong asset (like, a small business loan to create a small business)? Is this a liability from day one?

The loan is for the value when loaned, based upon the credit-worthiness of the borrower more than the value of the asset.

A home appraised at $250,000, with a $200,000 loan out to a bad credit risk is worth far less than a home worth $200,000, with a loan of $250,000 to a good credit risk. I don't see where there's an argument with that.

[somdrenter]

Originally Posted by Larry Gude

I think he knows that. From previous arguments about this, he likes mark to market. I'm not sure why. I still don't know why.

Actually, I could come around to your quarterly evaluation. Would a 20% decline in a quarter be the same as a 20% decline over the equivalent number of days?