Filed under: Fair Value Accounting, Generally Accepted Accounting Principles, Real Estate
In an opinion piece published in American Banker, president and chief executive officer of the Community Bankers Association of Georgia spoke in favor of current legislation that would “provide relief for real estate-related assets by allowing community banks to amortize losses on commercial real estate loans and ‘other real estate owned’ (repossessed properties) over 10 years for regulatory capital purposes.” The Communities First Act, first introduced to Congress in 2011, “provides a broad range of much-needed regulatory and tax relief for community banks and their customers,” said Brown.
Current mark-to-market rules under generally accepted accounting principles (GAAP) require the immediate recognition of losses.
Decoupling GAAP from regulatory accounting practices, says Brown, would allow community banks to more easily spread real estate losses over a longer period of time and give them better opportunities to work with borrowers rather than foreclose.
“Regulatory, tax and paperwork requirements disproportionately burden community banks, which lack the scale of larger institutions over which to spread legal and compliance costs,” Brown continued.
This legislation could stimulate a struggling economy by allowing small community banks to lend more easily to consumers and small businesses, many of which have limited funding options currently.
Filed under: Fair Value Accounting, Financial Accounting Standards Board, Real Estate
The Mortgage Bankers Association (MBA) submitted and published a comment letter to the Financial Accounting Standards Board (FASB), countering many of the assertions of the board’s proposed accounting rule changes.
The MBA stated that the application of fair value measurement to all financial instruments will “unnecessarily increase the complexity in financial statements that would adversely impact preparers, users and regulators.”
While the FASB has said in its exposure draft that application of fair value measurement will heighten transparency and understandability of financial statements, the MBA countered that notion in certain applications.
“Fair value is not the most relevant measurement for assets and liabilities for which the business strategy is to collect or pay contractual cash flows,” the MBA wrote. It suggested that amortized cost better reflects expected cash flows. “MBA especially disagrees with the notion of including in the fair value of an entity’s liabilities the change in the entity’s own creditworthiness through earnings.”
MBA concludes its position: “MBA believes qualitative along with quantitative information is more user-friendly, which is why MBA believes the current balance sheet presentation along with robust footnote disclosures is preferable.”
One of the few publications with a somewhat positive outlook for the world’s financial future is Anatole Kaletsky’s Capitalism 4.0: The Birth of a New Economy (Bloomsbury 2010). The title stems from Kaletsky’s writing that the United States has now entered a fourth era of capitalism, after the third era of free-market economics that ran from 1980-2008. His belief is that, in historical terms, the 2008 collapse was an aberration, a blip on the historical map. Also crucial is his belief that the 2000-2006 housing bubble was merely a correction of a previous slump and not a bubble at all.
However, Kaletsky is critical of many financial decisions that led to global panic, specifically mark-to-market accounting in the banking sector. Much of his blame is directed towards Hank Paulson, former U.S. treasury secretary and head of Goldman Sachs. Kaletsky argues that the adoption of mark-to-market accounting rules for securities was a disaster for assuming that the market value is always the correct value, thus minimizing regulators’ discretion. This practice, according to Kaletsky, overly exaggerated the peaks and valleys normally associated with financial markets.
While critical of recent economic rule changes, Kaletsky believes that pragmatism on the part of financial leaders will lead us out of the economic slump.
Former Federal Deposit Insurance Corporation (FDIC) chairman William Isaac spoke out against the current financial reform bill. Isaac says the troubles stem from the 2008 Troubled Asset Relief Program, more commonly known as TARP – the $700 billion bank bailout that followed the financial collapse.
Isaac has suggested that the subprime crisis and collapse of the economy could have been remedied by curtailing abuse of the short sale system in the stock market, or by revising mark-to-market accounting regulations that “needlessly destroyed $500 billion of capital in the financial system,” as well as allowing “the FDIC and the Fed (Federal Reserve Bank) to use their extraordinary powers to contain the crisis.”
The current financial bill, which includes new mark-to-market accounting rules, has become a political issue. Isaac said, “the Treasury itself decided about two weeks after TARP became law that it was a bad idea and never used it for its intended purpose — purchasing toxic assets from the banks.” This has become a source of contention for politicians who supported passage of TARP.
William Isaac currently serves as chairman of Global Financial Services for LECG, a global economic consulting firm.
Filed under: Federal Home Loan Banks, Market News, Real Estate
Federal Reserve Chairman Ben Bernacke noted recently that commercial real estate loans will soon need to be restructured. It is expected that the peak activity will occur in Q2 2012.
To mitigate the possible crisis that could result when property values and debt no longer square — or possibly never did given the lax approval processes that preceded the financial collapse — Bernake urged that cash flow analysis be paramount in developing restructured deals. As Bernanke explained, “Commercial real estate loans should not be marked down because the collateral value has declined. It depends on the income from the property, not the collateral value.”
Bank regulators have not yet publically agreed to using cash flow instead of marked to mark collateral values for determining the value of these loans to be restructured. It is anticipated that they will.
Ben finally gets it. It’s the economic value that matters, not liquidation price. Let’s hope all of the other regulators get the memo and apply. Ben’s prudent proclamation to residential real estate, too.