So what exactly is Mark to Market and why does it matter? Is this going to have an affect on the housing market in general, and more importantly, how might it directly affect your Portland home mortgage?

We’re going to attempt to give an overview of it below hopefully so you’ll better understand it, and more significantly, understand how it has played such a major role in our existing economic crisis, including the Portland mortgage market. It may come as a surprise to discover that this accounting rule (i.e. law) has significantly more to do with the current economic down turn than perhaps anything else.

Before we even begin to look at how Portland mortgage rates get affected, we’re first going to discuss why Mark to Market exists in the first place

To fully understand Congress’ inspiration behind making this accounting rule, we have to look back at the stock market crash that happened in 2000 to 2002.

At the time, before this rule was devised, companies such as Enron and Arthur Anderson figured out ways of ‘cooking their books’ in order to make the balance sheets look a lot healthier than they really were. This, in turn, caused their stock values to be falsely inflated,playing into the creation of the ‘bubble’ that, as we all know all too well eventually burst. When that occurred, a lot of people lost tons of money. To suggest they were unhappy is a huge understatement. Something had to be done.

The idea of “Mark to Market” accounting was created to try to make things significantly more transparent and to be sure of fair valuation of companies and their assets. Basically, what it means is that all assets have to be valued just as if they were sold on a daily basis. For those who decided not to do this conservatively, they put themselves at risk for potential jail time.

Let’s now have a look at how this concept can be a problem affecting the whole economy, including Portland mortgages.

When you consider the huge amounts of money handled by banks – not to mention the wide (and odd) variations of financial instruments they use, – it can be difficult to try to get one’s mind around exactly what they do. It will be more effective to illustrate how this accounting strategy works using an analogy more approachable to the rest of us.

Let us say you live in a neighborhood and all the homes are worth right about $200,000. Let’s also say that your neighbor owns his house free and clear.

All of a sudden you neighbor has some serious, major medical expenses and has to sell his home to pay forit. What he needs is money now and does not have the time for a Portland refinance, and he is in no position to wait for the best price he can get. Instead of waiting, he sells the house for $150,000 to get rid of it fast, even though it is clear that the house is worth quite a bit more than that.

If you so happened to live next door in a very similar house, does the fact that your neighbor’s house sold for $150,000 mean your home just lost 25 percent of its value? No, of course it doesn’t. If you were to sell your house, you would take the time needed and get the fair market price for it; you would not be forced into a “fire sale” situation like your neighbor.

However, if you were a publicly traded company and it was mandated by law to comply with the Mark to Market accounting rules, you, as well as all your neighbors, would now be forced to claim that your home was only worth $150,000 and not the $200,000 everyone recognizes to be the actual market value.

Let’s take a look at how this would apply to a bank.

Allow me to present some more hypotheticals.

We’re going to pretend you decided to open a new bank, let’s call it YOUR BANK. You start with a $2 million initial investment to get Your Bank going. Your strategy to make money as a bank is to take in other people’s money as deposits, you will pay them a safe but low return on that money, and then use the funds to create other loans, such as Portland home loans, that pay you a higher rate of return. The difference between the two is your profit that you get to keep.

Let’s say that from our $2 million of deposits, we create $30,000,000 worth of loans. Our Capital Ratio (the ratio of loans to capital on hand) is at a comfortable 15:1 ($15 million in loans for every $1 million in deposits). This ratio is completely acceptable by banking standards.

We’re going to imagine that you run your bank by extremely conservative standards, and the Portland loans Your Bank agrees to make are only those of the utmost quality. For instance, you require a 30% down-payment (normal is 20%, or sometimes even less), you require a credit score of 800 (this would be an extremely high credit score), you demand full documentation of all income and assets and only allow a debt to income ratio of 10 percent (40% is the industry norm).

It is exceedingly clear, Your Bank will only make the highest quality Portland loan. And it’s evident. All your borrowers pay on schedule, no one is unhappy and Your Bank is making money. This causes Your Bank stock to continue to climb.

All of a sudden, the Portland real estate market begins to slow down and go soft, and Portland home values begin to drop (however, your borrowers continue to make all their payments on time, no problem).

The problem is, with the industry wide reduction in home values, you have to re-assess your loan portfolio valuation. Now, rather than the loans being 70% of the value of the home, they are at 90% (your equity position in the home just went down considerably). This means these loans are considerably riskier than back when you had more equity, and since they are riskier investments, people are less interested in buying them than they were before and therefore they now have less value.

Your accounting team now tells you that, according to the law, you must “Mark to Market” if you don’t want to risk a serious penalty (such as jail time!) In the Mark to Market analysis, the estimated value is now at $1 million; it has been reduced by half!

Do not forget, not a thing has changed concerning your borrowers or your loans (they all still pay on time so the funds are still coming in just as it always has). The difference now however, is that you now need to reflect the fact that Your Bank’s ‘value’ has been cut by 50% to only $1 million.

The problem is, you still have $30,000,000 of loans outstanding, and with a valuation of $1 million, the capital ratio now stands at 30:1 and that is a LOT different than 15:1.

Alarm bells start going off everywhere because with just a handful of loans that go bad that you would be forced to cover, you might quickly run out of funds. This could put depositors at risk of losing their money.

So all of a sudden the FDIC is starting to look into Your Bank and then the SEC (Securities and Exchange Commission) is asking all kinds of questions. Your Bank stock price begins to to tumble. Every one of the financial news networks get a hold of the situation and just pour fuel on the fire.

Your Bank is in deep trouble.

The thing is, Your Bank is ‘over leveraged’, and to counteract for that you are going to have to begin selling some of your assets. (As an alternative, you could try raising some capital, but considering the way things look and your capital ratios totally out of balance, no one in their right mind is going to be willing to lend you the million dollars you need).

Since you need to get that money as soon as possible, you find yourself in a similar situation to that of your neighbor who needed to ‘dump’ his home extremely quickly at a below market price. As you sell off as many assets as possible to raise capital as fast as possible, at the same time you are minimizing the value (i.e. quantity) of your remaining assets, further skewing your capital ratios even further.

This is a kind of death spiral that is very hard to stop once it starts. The thing is, the problem does not end with just Your Bank.

Now let’s say that my Portland mortgage company (we will call it “My Bank”) bought those assets from you. You were offering them at such a great price that My Bank felt we were getting such a fantastic deal that we couldn’t resist, so we bought a whole lot of them.

The trouble is, with the Mark to Market rules, the assets My Bank just acquired from Your Bank at such a discounted price must be used as comparables that all other financial institutions also use to value their assets. So now every $200,000 Portland mortgage loan that My Bank was holding (not limited to just the ones I got from Your Bank) now only have a value of $150,000 each regardless of the fact that they were perfectly good performing loans.

So now we have a situation where the value of My Bank also goes down. As this happens it disrupts My Bank’s capital ratios and causes me to sell assets as quickly as possible in order to generate funds… and so the cycle goes on and on.

It’s not hard to see how quickly and wide spread the problem becomes, regardless of the fact that there wasn’t necessarily any ‘bad business decisions’ that were made. It’s all caused by a well intentioned, but over-reaching, accounting law.

If you think about the situation described above, you might ask yourself, “Why don’t they have everyone just stop purchasing the discounted assets from the other banks and stop the cycle?” This is a very fair question.

When the cycle is stopped, not only will some financial institutions fold, but the flow of money just stops. This is what’s referred to as the ‘credit freeze’. With no credit available, mortgage loan originations come to a crawl, car and truck sales basically stop, people lose their jobs and the whole economy goes into a recession.

We’ve been in, and gotten out of recessions in the past. Why don’t we do the same thing we did during the last recession of 2001?

The minor recession of 2001 recovered pretty quickly largely because the Fed brought interest rates down and mortgage lending standards were considerably more relaxed, which ultimately led to roughly $3 trillion worth of cash being extracted in the form of equity from homes and injected into the economy.

In today’s world, mortgage guidelines everywhere (not just the ones Portland mortgage brokers are dealing with) are much more restrictive, house values are considerably lower (and they’ve been headed in the wrong direction for a while). And as mentioned earlier, the sad truth is that there is simply not very much money flowing out there for Portland mortgage companies to access for either home purchase loans or for a Portland mortgage refinance.

However…

Some good news for a change!

4/2/2009 – Today the Financial Accounting Standards Board (FASB) voted favorably in regards to relaxing the Mark to Market standard. They are going to allow financial institutions to use alternatives such as cash-flow analysis to value assets. This change will significantly reduce the write downs banks have needed to take on assets and investments like mortgages. This could very well mean more liquidity will soon be available to your local Portland mortgage companies. We’ll hope so.

No matter whether you are purchasing your first Portland home or are an experienced homeowner, you may likely need a mortgage to make such a huge purchase. Regardless of where you live in the area, there’ll be multiple Portland mortgage lenders who you could use to make purchasing your place possible. How are you able to choose the best Portland mortgage broker for your budget? Here are some tips for doing exactly that:

Shop for the best Portland mortgage rates.

When it comes to Portland home loans, finding the best Portland mortgage rate is critical. Some may claim that it is essentially the most significant part of deciding on a mortgage company. Don’t stop window shopping with just two or 3 quotes; get as many quotes as you can. Don’t forget, the total cost doesn’t only mean the interest you will pay. When you talk to a loan officer for the first time, they should give you a good faith estimate which includes interest rate information as well as closing costs. You should be prepared for to spend at least $2K to $5K in closing costs and more if you are purchasing a million-dollar (or more expensive) house.

With some Portland mortgage companies closing costs may be on the low end, while with other mortgage lenders, you could be paying a lot more. These are out of pocket fees, so you should be ready to pay for them them upfront, just like you do with your down-payment.

Be prepared with your credit score that banks can review. When picking a mortgage lender, a good tip to make sure that you find the highest qualtiy one is to be ready with your credit history and FICO . Most mortgage firms will review this information if you can get to the point at which you want pre-approval, but you’ll likely have to pay a fee to get your credit report through them, and too many checks can essentially lower your score if they are spread out over a number of months. You can take a look at your own credit history free once a year, so before you start looking for a lender, print your credit score and discuss with them based on the information.

Now, when you actually chose a bank, you’re going to need to pay for the official credit check, (but there is no necessity to pay for that until you have selected a final lender.) In the meanwhile, get ideas about what the expenses could possibly be using the unofficial credit score you have. Avoid any pre-approval that has a very high interest rate. Some banks will attempt to try to get you to select them by pre-qualifying you at high rates. Remember, you know how much you can really afford every month. If you only have enough money for a monthly payment of $1000, getting pre-qualified for a $1,000,000 home is just asking for trouble.

The best mortgage banks in Portland will always have your best interests in  mind. Pre-approving you for more house that you can afford is a red flag this company does not truly care about your and your finance situation.

Ask questions about your potential Portland mortgage loan.

Searching for a Portland mortgage bank is all about asking good questions, and the more you ask the better. Don’t be nervouse about the answers, because it’s way better to understand now rather than in a few months when you want to buy the ideal home you found and only then realize there are problems. Ask your questions not just about cost, but also about what to expect it terms of turn times, trends, and reliability. of your lender.

If it is possible, talk one-on-one with the person that is going to work with you on the loan, instead of just talking to a processor or receptionist. One of the best methods to ensure that you are being given the answers you want is to basically write down your all your questions beforehand. In doing this, before you hang up the phone or leave the office, you can look over your list of questions and be confident that all your queries have been answered.

Finally, when you are looking for Portland mortgage brokers, don’t forget that that there are two different places to look.

Web based mortgage companies can sometimes be a great option. At plenty of on-line sites for example, you can look at their rates and the intereset ratesof other firms. However, other folks find that the best option is to use a bank in their own local area. When you first begin your search, don’t restrict yourself to just search for online firms or only offline firms; look at all the companies you can. For instance, if you aren’t happy with working with a company based on line, you can still use resources such as rates from these firms for comparison purposes.

The thing not to forget is to simply keep shopping as much as possible until you find you find a Portland home mortgage company that is a proper match for your personal needs.