Xorthfred

Our Clueless Congress Strikes Again

Thanks for your excellent article. I agree that Paulson made the right call to stabilize the banking system with the TARP money. I also think that commercial mortgages are now sitting in the bargain bin (for those properties not in California, NY, Florida, Arizona, Nevada and Michigan). The commercial mortgage delinquency rate remains (for now) below historical averages, yet the mortgages are BEING COMPLETELY WRITTEN OFF DUE TO MARK TO MARKET ACCOUNTING!

Read it again in disbelief but it is true if you understand bank accounting. The OCC auditors like to see Reserves (write offs) as a percentage of non-performing mortgages rise during downturns in commercial real estate. mark to market accounting forces banks to reclassify performing (paying on time) mortgages to non-performing. If a bank has reserves (write offs) only 20% of nonperformings and nonperformings are rising, then the auditors want to see that percentage rise.

Example: Bank has one billion $$ of nonperformings. They have reserves of $200 million. Under mark to market accounting, some $6 billion of commercial mortgages that are current with good debt service coverage now are selling for 80 cents on the dollar based on the cds and cmos (cdo) markets. The accountants force them to take a write off to market value of $1.2 billion. Now these loans are "non-performing". "Non-performings" (even though they are current and paying) now balloon to $7 billion. Reserves now are $1.4 billion. The accountants would like to see Reserves as a percentage of non-performings at 120%. Result: another write off of $7 billion.

This scenario played out at Citicorp in the 1989-1993 time period.