Letter to Americans
Lending in America: Help Save the Economy
No one will deny that the economy is currently under great stress. The stock markets are off dramatically, economic growth is severely curtailed, and unemployment is on the rise. Lending for critical purchases like home mortgages, college loans, and automobiles has virtually dried up. Trillions of your tax dollars are being poured into the economy along with massive interest rate cuts to jump start the economy.
You have probably heard the debate over a concept called “mark-to-market” accounting. We believe that parts of mark-to-market accounting have unnecessarily exaggerated the asset declines we have experienced over the past twelve months. We also believe that unless this problem is rectified, the economy could unnecessarily languish for some time. This situation can be illustrated with an analogy.
Let’s assume you as a homeowner were subject to mark-to-market accounting rules. You bought a house for $300,000 and put 10% down, assuming a mortgage of $270,000. Now comes 2008, and the estimated value of your house drops to $240,000. Not good news, but you don’t plan to sell right now and you continue to make payments. Under these mark-to-market rules, however, here’s what would happen:
- Since your estimated house value declined and is considered an “impaired asset,” you must immediately pay the bank another $54,000 to make up for the decline ($270,000 minus 90% of $240,000 because the bank wants you to get back to the original equity percentage). It doesn’t matter that you made every payment. It doesn’t matter that you will continue to make the payments. It doesn’t matter that you have no plans to sell the house.
- Today, most Americans don’t have an additional $54,000.
- The lender forecloses and sells the house in a depressed market, causing home prices to fall further, creating new “impaired asset” dilemmas for many more homeowners who have never missed their payments.
Who would be willing to buy a house today if that were the rule for a borrower?
Although this analogy oversimplifies the mark-to-market concept, it does illustrate real issues that U.S. financial institutions face. Financial institutions are currently subject to these kinds of rules. A $1 reduction in capital reduces lending capacity by approximately $10. This has dramatic implications for their ability to make new loans (and for your ability to receive one), which is essential for economic recovery. Much of the core lending in the United States is being impacted by both the reality and fear of mark-to-market accounting. You need to educate yourself before this problem gets much worse. Please go to www.marktomarketdebate.com right now to learn what you can do to help resolve this issue.
Richard S. Berg
CEO
Performance Trust Capital Partners
