Quote:
Originally Posted by s_wilwerding
Think about this way. Suppose that I put 5% down a house and finance the rest. I plan on staying in the house, and I have never missed a mortgage payment in three years, so I'm a pretty good risk. Now, suppose that I bought at the top of the housing bubble, and now my house is worth 20% less than I bought it for, but I only own 10%, so I'm underwater.
If the bank had to "mark to market" my house, it would show as a loss, even though I'm making my payments and will probably be in the house long enough not to be underwater. The bank can now not lend money to anyone else, because they've "lost" some of their money on my house and perhaps a lot of others like me. If a bank has enough of these type of loans, they will have "lost" enough money to go out of business, even though they are holding assets that paying off.
In a less regulated business, mark to market makes sense, but in banking, where you have to have a certain asset to debt ratio, mark to market can ruin a bank even though their assets are pretty stable.
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No, that is
not what mark-to-market is about.
Mark-to-market would be
you figuring your net worth and recognizing, at that point in time, you were underwater on your mortgage. (The "market price" on your house was lower than what you owed on it.)
"Mark-to-model" (which is what certain people in the financial industry want to return to) would be for you to
not recognize the current market value of your house when figuring your current net worth. Instead, you would "make up" a value for your house (probably based upon some expectation about its possible future market value) and "pretend" that you were not currently
underwater on your mortgage.
"Mark-to-model" is all about
ignoring "unpleasant" realities.
"Mark-to-market" for the
bank would involve the banks having to value their loans -- including those where the collateral is worth less than the outstanding loan -- at "market determined" values, not some "model" they make up.