October 24, 2008
This is a revised comment from a previous comment made yesterday. Please delete previous comment.
I ask that you review FASB Standard 157 Mark to Market accounting which deals with the so called "Fair Value Accounting". Mark to market accounting works well for securities as banks have the option of placing their securities in either "Available for Sale" (AFS) portfolio or "Held to Maturity (HTM) portfolio. If securities are held to maturity then no recognition of gain or loss is recognized, however, the AFS securities which can be sold prior to maturity, is valued at market, which seems to be a reasonable accounting method.
However, in the case of loans, it is not fair to place this same type of valuation as we don't have the same circumstance. We do not place our loan portfolio into two categories, as we do in the security portfolio. The object of mark to market accounting is to recognize value immediately instead of waiting for the asset to sell. So instead of taking a sizable loss when the asset is sold, most of the loss is already recognized. The whole premise of mark to market accounting for loans is entirely flawed. It assumes that assets will be sold at a loss.
When a bank has a mortgage loan that has been impaired, it is now required that the financial institution write down the collateral to market. In this current market, where real estate values have tumbled, valuations are all over the board. There are many distressed sales where there have been forced liquidations. However, these distressed sale prices are not indicative of the fair value of that property Many of these homes where sold at very low prices due to the condition of the property. As an example, there was a house that was sold due to foreclosure at a greatly reduced price from other homes in the same area, however a block away a similar house that was sold by a realtor sold for $75,000 more than the foreclosed home.
The fallacy of the mark to market valuation is that it is assumed that in a down market when a loan has been impaired, the property will be sold in the lower market. In most cases, if the market is well below the loan value, the bank has the option of waiting until the market is more favorable. It does not have to sell the property, so the mark to market valuation is extremely harmful to the bank's financial statements and misleading to the public and shareholders.
If this ruling does not get overturned soon, it will have a profound and devastating effect on the financial statements of our financial institutions. I recommend that the SEC require banks to value their assets at amortized cost and if a loan becomes impaired, there should be no recognition of valuation until the asset is recorded to OREO. As long as the footnotes of the financial statements contain a valuation disclosure notice, the public and shareholders have been alerted and not misled.
Please overturn this ruling as quickly as possible, otherwise it will have a devastating effect on banks and it will make this economic crisis much greater than it needs to be. Congress is already considering throwing $1 Trillion at an attempt to quicken the recovery, but money doesn't work when the accounting and tax policies that are initiated counter act this. So let's get this accomplished sooner than later. Thank you for you attentiveness in fixing this enormous problem.
Vern Montroy
Executive Vice President and CFO
Community Security Bank
New Prague, MN