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

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.

Comments

[Sundialsvc4]

Here is human nature 101: we are all sonofabitches. No, really. We all are. Or at least, enough of us to make things royally screwed-up for the majority.

Given the opportunity to steal, and possessed of an insatiable greed, certain humans will not -- truly cannot -- stop stealing. They will stuff their mouths with gold coins until they choke upon them, and still try to stuff in more. And always, "it's all about 'them.'" And as for you and me: "well, if they are going to die then they had better do it, and relieve the world of its surplus population."

Do not look for a Congress to willingly do the right thing: they are, as they say today, "PWNED." Ring the golden bell and they salivate ... and then pee in the carpet.

This is crime, and high crime, and all 306 million of us are plaintiffs. But, do not expect them to care. Until his dying day, some part of Al Capone probably thought of himself as a furniture salesman.

[schatsie]

I tell you why the banksters won't take the hits...
1. They will go bankrupt.
2. They will loose their pensions
3. They will loose their bonuses
4. They will have to take a PAY CUT.
5. If they have any stock, it will go down in price....

[joebhed]

ummmmm......

I think you're missing one point, but your overall approach is way too sound to be spoken aloud - only OK for semi-progressive blogging.

The point you are missing is there is no problem valuing the underling Mortgage portion of the legacy assets that underlie the Mortgage-B­acked-Secu­rities. As you said, find the mortgage, and no problem in valuing it plus-or-minus 15 percent in any market.

The problem is OSTENSIBLY with all the other junk that has been piled on top of the mortgage by way of "securitization" of those MBS SIVs. But this problem with the overall MBS is just as easily resolved.

Any bank or non-bank that fails with a standard amount of perfectly ordinary MBS in its portfolio, rather than transferring those assets to another receiver-bank, the government holds them and then auctions them off. Just one bank with a good slug of traditional RMBS's would resolve the mystery of the meltdown, which is, what is all that crap really worth.

My answer has been 20 percent of face value or less.
And then, your point becomes completely valid.

If the government can value those assets through its own auction, well then we have an excellent idea of what all that crap is not worth, and we can begin the deferred write-down to true present market values.

[Sinick]

In order to keep my BP in check, I promised myself that I would not pay attention to this stuff anymore. I couldn't, and all that I can say is "banksters -- AAARRGGGGHHH!