Thursday, June 10, 2010

"Mark to Market"- This may get interesting.........

"Yesterday FASB (Federal Accounting Standards Board) put
forth its proposal that banks report the fair value of loans on
their books and accelerate recognition of credit losses. If that
rule was in force now you know what it would mean: no
more pretend and extend, a lot more distress. For borrowers
the former would have made a painful period a lot worse;
for opportunistic funds, it would led to more buying
opportunities. Indeed the Wall Street Journal reported this
week that many of these funds are returning money to
investors as their commitment periods end because they
haven't found anything in which to invest."

Full article here.

From a related story:

"FASB's proposal 'presents significant problems, not only for
banks, but also the general economy,' Edward Yingling,
president and CEO of the American Bankers Association, said
in a statement Wednesday. 'If implemented, the proposal
would greatly undermine the availability of credit by making it
difficult to make many long-term loans, the value of which,
even if performing perfectly, would likely be reduced on the
day a loan is made.'" Full article here.

Faithful readers of this blog will know that, in my opinion,
the recent buying frenzy pushed investment real estate
values into unsupportable and non-sustainable realms.

One could logically assume that I believe a price correction
is necessary. But that would only be partly true.

Most real estate did not sell during the "bubble" years and
most property owners did not overpay for their real estate.
It is only the excesses that need to be squeezed out, not the
entire market.

The critical questions are how? and when?

A question: If the Federal Accounting Standards Board
rules take effect in 2013 as proposed, and the rules require
the banks to report the fair value of their loans today,
does that mean re-appraising ALL of their loans?

That's a lot of appraisals. Wonder who'll be paying for them?

Appraisals are merely one person's opinion, based on their
interpretation of available data, of a property's fair market
value. It is not etched in stone that their opinion accurately
reflects its true value.

I don't know if the Federal Accounting Standards Board has
looked at the appraisal business lately, but as a not-so-
casual observer I would say that confusion reigns. New
regulations on the appraisal industry now make it more than
likely that an out-of-town appraiser will be doing the
appraising. With no local knowledge, the appraiser will be
relying on dry "comparable sales data". With the freeze up
in the lending markets, and the current abeyance of a real
marketplace of buyers and sellers, a significant percentage
of those comparable sales will be distress sales and
foreclosures. Using this type of comparable sale means that
appraisals will trend ever lower, which will force more
currently performing loans to be classified as non-performing,
which will in turn cause the banks to be less willing to loan,
which in turn......well, you get the picture. It becomes a
self-reinforcing downward spiral.

One of the troubles with having financial institutions that are
"too big to fail" is that those who have to guarantee the losses
when they do fail then pass all kinds of fancy regulations to
try to keep them from failing again. As a firm believer in the
law of unintended consequences, I know that well meaning
regulations always cause more problems than they solve-
like the recently created appraisal regulations- and that the
burden of following the regulations usually falls on those
whose solid and steady business practices did not need
regulating in the first place.

Wouldn't it make more sense to limit the size of these
financial giants so that they were not too big to fail? Then
let failure be the punishment for making too many bad loans.
Market discipline is surely more efficient and effective than
regulatory discipline.

Why can't we just muddle through for a while longer
without any well meaning regulations that just make it
more difficult for prudent business people to do business?

If we are ever going to get the employment numbers back
where they belong it will be because prudent business people
feel confident that they will be able to profitably do business
again. It is only then that they will begin to expand and grow
and add employees.

The prime rule for regulators should be: First, do no harm.
The FASB "mark-to-market" rules will do significant
harm without any apparent significant benefit.

But, then again, I'm a borrower and maybe that bias is
showing.

1 comment:

  1. Regulators regulate. They are convinced that the reason that things go wrong is poor regulation. How many times have you heard "the government needs to do something about [whatever]". So they do something even if affirmatively doing nothing is the best course. Change and improvement aren't synonymous.

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