I wrote the post below a number of weeks ago, but never posted it, because I felt it didn’t apply to the second home industry. But after reading an opt-ed in the WSJ this Saturday, I realized my thoughts were right on about the problems in the mortgage business, “mark to market” accounting principals are a big part of the problem:
This isn’t my typical “second homes” blog entry, but it does effect our topic, as a healthy mortgage market is critical to the continued growth in sales of the Second Home Market. Second homes prove communities the best kind of residents, those who pay taxes, generate jobs, add to the culture of a community - as part time residents who use don’t use the schools or as much of the infrastructure.
Dear Editor:
Dig below the surface of the mortgage crisis and you find a fundamental flaw of the panic that I have not yet heard mentioned in the media - its all being caused by FUZZY MATH.
See, it’s not that American’s have actually stopped paying on home loans, better than 97% of mortgages are NOT in default, and this is historically within trends. This is not the source of the hysteria.
FASB, the ‘generally accepted’ accounting rules that require lenders to ‘market-to-market’ the value of their loan portfolios creates an artificial panic in financial markets whenever some lender panic sells mortgage backed securities.
Consider the real estate market, you own a home, that you have no intent of selling for the long term. Your neighbor gets a job transfer, and sells his home for far less than you would ever consider. Then another neighbor gets in financial trouble, and looses his home to a foreclosure. The Market Value of your home has fallen, but if you aren’t selling, how does this effect you? It doesn’t, you keep making your payments to the bank and everyone is happy.
If you were a mortgage lender, in the same scenario, your lender would call you and say “the value of your assets (mortgage loans) have dropped because ABC Bank just sold cheap, and you have to pay a margin call.” Lenders have had to pay to keep their loans on their books, regardless of whether the loans on current or falling behind.
Long-term assets (loans) should be treated differently by accounting standards. Mark-to-market accounting is killing the mortgage business.
Bob Waun
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