Mark-To-Market : How An Obscure Corporate Accounting Rule Might Impact Your Mortgage Rate

You know you’re in the middle of an economic crisis when an accounting issue become Front Page News, and that’s exactly where we’re at today.

Mark-to-market accounting is having its day in the sun and people in need of mortgage sometime soon would do well to pay attention. 

If you’ve never heard of mark-to-market accounting, don’t worry. Not many people have.  Mark-to-market is a method of valuing an asset based on its what-if-it-was-sold-today value.  Mark-to-market is officially known as FASB Statement 157.

Mark-to-market is one reason why bank balance sheets look so awful right now.  Banks have to assign firesale-like values to their mortgage-backed assets even if those loans are performing, and even if there’s no plans to sell them.  Assigning low values to assets, then, in turn, forces the banks to seek TARP funds and take other measures to solidify their mandated capital requirments. 

Wall Street and Washington are taking notice of mark-to-market’s impact on banking and, by extension, the economy.  Even Fed Chairman Ben Bernanke has expressed an interest in opening a dialogue about the matter.

So, today, starting at 10:00 AM ET, the House Committee on Financial Services meets with key members of the Securities and Exchange Commission, the Treasury, and the Financial Accounting and Standards Board to talk about mark-to-market accounting and whether it should be modified.

It’s unlikely that change will come immediately, but if enough evidence shows that mark-to-market is unduly damaging to the economy, expect changes to the way we value banks to happen soon. 

For homeowners and home buyer, a reversal in mark-to-market rules would be a bad thing.  Almost overnight, bank balance sheets would recapitalize and the economy would spring forward.  This would reverse most of the pressures that have held mortgage rates low for so many months.

A healthy economy, in other words, may be bad for mortgage rates.