Huffpost Business
The Blog

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Michael Roston Headshot

If the Government Can Fairly Value Its "Troubled Assets," Why Not the Banks?

Posted: Updated:

A very interesting story in Friday's USA Today notes a number of federal agencies, including HUD, own a lot of houses that they're having trouble selling. Sound familiar?

In many ways, the government's situation parallels what thousands of other homeowners are confronting: The houses it owns are harder to sell, they typically sit empty longer, and in many cases, their values cratered as the real estate market collapsed.

Since 2007, the Department of Housing and Urban Development has acquired at least 110,000 foreclosed houses, its records show, spending about $12.2 billion to reimburse lenders after the owners defaulted on government-backed loans. So far, HUD has been able to recover only about $5.5 billion by reselling them. It has about 38,000 homes still for sale.

The government's houses are divided among a handful of agencies. Most came into federal hands when borrowers defaulted on government-backed mortgages; in some cases, the government foreclosed on loans it wrote, or took over foreclosed properties from private lenders. The list doesn't include homes repossessed by federally chartered mortgage giants Fannie Mae and Freddie Mac.

I'm no expert in mortgage-backed securities, banking, finance, or math, but I do know this: when the government is unloading these houses, it's making a determination that it knows how much they're worth. When it chooses not to sell them in some enormous federal fire sale at Crazy Eddie low prices, it's saying there is a price it won't sell below. So if our bloated federal bureaucracy can figure how much its troubled assets are worth, why can't the bailout-munching banks?

In March and April you may remember, or perhaps you deliberately forgot, there was a whole fight between Wall Street and some in government over 'mark-to-market' accounting rules. Quick refresher: the Treasury and the bailout recipients were debating how to value the mortgages in the toxic securities they were holding on to.

How much were they worth? Here's how the conversation went, in Mime:

Investment banker: [Stretches arms out as wide as he can]

Treasury official: [Hold hands very close together]

Translation for those of you who don't speak Mime: the banks were saying they were worth A LOT, and some in government were saying the securities were only worth a little bit.

The good folks at NPR and Planet Money offer a good recap of how this all went down, but basically, the Financial Accounting Standards Board eased 'mark-to-market' rules that would have forced the banks to take steep losses. Instead, the holders of the mortgage-backed funny money were given flexibility that allowed them to value the assets as though they were being unloaded in an 'orderly sale.' Which is funny given how orderly everything appears these days.

The government assented in this cockamamie scheme, agreeing that the market was in a funny state. And this angers a lot of people because it makes it look like the government was allowing the banks to say their toxic assets were worth more than they really are.

But the government, with its sales and non-sales of distressed mortgages it now owns, is showing us that there's another way. It's not the way that Goldman Sachs-linked Treasury officials would approve of; it's a method devised by the bureaucratic drudges at HUD and the VA and the USDA. Not financial rocket science engineering, just a creditor saying what it actually thinks an asset is worth.

It seems like everyone could win in the bailout if Treasury just took the methods being used in other agencies and adopted them. It would allow the banks to say, "we won't sell below this price," and the Feds to say, "you only have to lose as much money as we do." It might not be financial services industry best practices (whatever those were), but it could be a "best we can do during these sour times" practice.

Read more at True/Slant.