Suppose you take out a fixed rate mortgage and the rates subsequently go up. At this point the market value of that loan is lower than it was. Suppose you would like to buy it back from whoever currently owns it at the new market value (or let’s say slightly above it, to cover administrative costs and some profit for the seller). Is this possible?
I’ve never heard of such a thing being done. I can think of several reasons that this might be so.
[ol]
[li]The debt holders know that there’s a percentage of people who will pre-pay the entire face amount of the loan even above market value (especially if the house is sold), which would give them significant profit, and they would stand to lose this profit if they allowed for repurchases.[/li][li]The loans have been bundled and repackaged in such as way that does not allow for individual loans to be marketed.[/li][li]The accounting rules are such that allowing market price sales would result in paper losses.[/li][/ol]But I don’t know. Is it correct that it can’t be done? (And if so, is it for a reason other than the above suggestions?)
How could selling something at or slightly above market value result in real losses?
It could result in paper losses if the debt holder is allowed to carry the full face value on their books, such that a market value sale would be a “loss”. But that is not a real loss.
While the bank still holds the mortgage, and its lower value is “marked to market”, it counts as a paper loss. Once the bank sells that mortgage at that lower market rate, that becomes a real loss.
For example: if you bought NFLX stock at $300 and are still holding it, you’re looking at ~$220 per share paper loss right now. Once you sell it at $80, it becomes a real $220 loss.
If it’s already been marked to market, then what changes when they sell it?
[ISTM that the true value of the bank’s assets is impacted by the market value decline, however the accounting value is impacted by the sale. Which one of these is called “real” versus “paper” depends on your perspective, I guess.]
“Mark to market” is a paper loss. When you sell it, it’s a real loss. Investors look differently at paper losses vs. real losses, especially if the market is expected to recover at some point. One of the companies whose stock I hold had a huge negative paper value at some point a while ago. It is recovered quite nicely now. If they had sold their assets at that point, they wouldn’t exist today.
I disagree. Mark-to-market - to the extent that it’s a real market-driven number and not something made up by the company, is what the market cares about.
What does sometimes happen is that the market already knows that the value of a company’s portfolio has been decimated, and has already reflected this in the company share price. In this case, when the company gets around to reflecting it in their book value it has little impact, because it’s already priced into the market value of the company. But it’s not that the market doesn’t care about the underlying loss.
Imagine - to use your example - a company whose main asset is its shares of NFLX stock. Do you really claim that investors will ignore the changes in value of NFLX stock in valuing the holding company, as long as the shares are not sold? To the contrary, every move in NFLX’s share price will be instantly reflected in the holding company’s share price. By contrast, when the company writes down the value of the NFLX stock - or sells it - it will have little impact, since this will already have been reflected in the price.
You’re right for the company’s holding of stocks. But other assets, especially complicated ones, like CMBSs, can have artificially low mark to market value, mostly due to relative illiquidity at the moment. Since a lot of problems with the mortgages is their relative “illiquidity” due to various reasons, the situation is similar.
Although I really don’t have faith in big corporate institutions, but when something is very clearly advantageous/profitable, even they usually grab at it. Settling mortgages at market prices is clearly not in any way profitable today. Who knows, if the government stopped propping them up, maybe they would think differently.
That’s why I wrote “to the extent that it’s a real market-driven number and not something made up by the company”
Any individual mortgage might be illiquid - you can’t walk up to a guy in the street and ask him to buy a mortgage - but the interest rates at various durations are very well known, and the calculation of a value should be pretty straightforward.
[And FWIW, I happen to own a private mortgage on a property, and I’ve been getting letters from an outfit reminding me that they will pay top dollar for the mortgage. So apparently there’s some sort of market out there.]
I’ve suggested several reasons that might hinder this.
The proper answer is to avoid the use of “real”. There are paper losses and realized losses. Either one of them is real. There are tax differences since by and large only realized losses have tax consequences and there often are accounting differences particularly when market or other disinterested third party prices are hard to obtain, or when regulations or perhaps indenture provisions are defined in terms of accounting losses
I think the bottom line is that banks get their benefit from chopping up mortgages and selling them as bonds. These bonds are already sold as a premium/discount to reflect the difference between coupon rates and market rates. So, from the bank’s perspective, the problem is solved and there’s no reason to do further buying or selling of the mortgage as market values change.
For the homeowner… well, the banks wrote the terms of the mortgage. So homeowners are stuck with these options: pay it up in cash, sell, or refinance.