Mark-to-Market Accounting Proposal: Threat to Commercial Market Liquidity

Trillions in Commercial Loans Come Due

Access to credit remains the number one challenge for commercial real estate. You’ve no doubt heard that approximately $1.4 trillion in commercial real estate loans will come due by 2014, and roughly 65 percent these borrowers will encounter significant trouble refinancing. Troubling as this is, credit availability for the fragile industry would be further reduced, if the Financial Accounting Standards Board (FASB) finalizes its proposal to expand mark-to-market accounting for all loans on banks’ balance sheets.

FASB’s Proposal – Book Loans at Market Value

Last year, FASB proposed a change to existing rules aiming to improve financial reporting and reduce accounting complexity. The proposal would require financial institutions to book their loans at current market value, a method known as “mark-to-market” or “fair value” accounting. This would force financial institutions to take huge write downs on assets that decline in value – significant – during periods of economic distress because of reducing overall credit capacity and prolonging the economic recovery.

In 2007, FASB reinstated mark-to-market accounting for complex financial instruments, such as mortgage-backed securities, which escalated the financial crisis according to many industry analysts.

However, in April 2009, FASB passed a proposal to relax these rules by giving companies more leeway when valuing assets, which helped calm financial markets. The changes came after Congress and business trade groups, such as NAR, criticized FASB for the damaging effects of mark-to-market accounting wherein loans backed by declining assets were written down, causing markets to freeze up and forcing more write-downs.

Proposal’s Underlying Effects

Capital is a key measure of a financial institution’s strength and banks will avoid commercial real estate loans that could require them to raise more capital to meet minimum capital ratio requirements. FASB’s proposal would hit smaller regional and community banks the hardest, especially those with high commercial real estate loan exposure.

Since many of these financial institutions originate and hold commercial real estate loans to maturity, the proposal would mandate unjustified write-downs and could cause many smaller financial institutions to fail.

NAR’s Position

The mark-to-market proposal comes at an inopportune time – in the midst of one of the industry’s worst financial crises. NAR believes accounting rules should be more flexible and recommends the use of other valuation tools to value assets in illiquid markets. NAR and its commercial affiliates have submitted considered opinions and comments to FASB reflecting these beliefs.

Stop the presses…

News of an NAR Win for Members!

NAR’s advocacy efforts – coupled with those of other industry organizations – have succeeded in having the Financial Accounting Standards Board (FASB) reverse its mark-to-market accounting rule proposal. The ruling would have required banks to use current market prices rather than book value to value loans on their balance sheets.

FASB indicated the overwhelmingly negative reaction to its proposal from organizations and investors played a large role in their reversal. The board received more than 2,800 comment letters (NAR’s among them) on this proposal, most opposed to the move. This win is testament to the effectiveness NAR’s 1.1 million members can have in shaping policy for our industry. Thanks for your support.