Mark To Market Valuation

With the new market-to-market valuation set to take place, you are going to see a drastic change in the way banks approach lending, appraisals and risk valuations. The reason is simple, with accountability come conservativeness and change. If the banks are going to have to value there portfolio and then adjust capital reserves to account for losses or devaluation of the asset essentially the entire banking system is going to be dependent on a credible upfront valuation and collateral assessment to determining a lending decision. Your going to see banks now be much more conservative when it comes to lending due to ratios having to be met throughout the life of the loan and a constant upkeep of capital reserve to maintain a adequate spread on the assets underlying value.

This will help ensure investor, regulators and consumers that the financial stability of the financial institution is not overstated.

Example:

ABC Bank makes 100 loans for $80,000(risk) with LTV of 80%(20%spread). All of these homes appraised for $100,000 (underlying value).

Based on these numbers a bank would have to keep at least 10% of cash in reserves based on the $8,000,000 in loans with a 20% spread and a total valuation of $10,000,000.

Now 2 years later the market takes a down turn (yes that can happen) and now after AVM's, BPO's or Appraisals are ordered a portfolio receives a value of $7,000,000 meaning now the risk or spread went from 80% to 110%. The new mark - to market laws would require an increase in capital reserves to cover the increased risk and maintain an adequate risk spread on the collateral.

Banks love this when the market is going up as it doest the exact opposite. Now with the market set to take another hit, banks are shaking as there 10% typical reserve ratio would almost double just to be on the safe side and prevent any fuzz from the FDIC and regulators.