Can someone with more knowledge than me explain a bit more about mark to market and how it applies to mortgages and Irish banks.
I understand, that mark-to-market involves valuing an asset at a fair market value, i.e. what it would sell for today. And is necessary in order to fairly value a company.
e.g. a 400k mortage on a 200k house might be listed in the banks accounts as an asset of 400k, but it’s market value would be 200k. And it the banks had to mark to market, they would register a loss of 200k. And reduce their balance sheet by 200k.
I understand the banks have provisions set aside for bad-debts/repossessions, but with the current government policy, they might value their 400k mortgage, at 300k, and only place 100k in their provisions.
Are the banks legally required under the various account standards to mark mortgages to market?
Are they going to be forced to mark to market via the troika/regulator/government?
Do they have enough capital/provisions if they are forced?
You’re operating under the assumption that a mortgage is in any way tied to a house’s current value in this country. It’s not. The mortgage is tied to whoever took out the mortgage, the mortgage is backed by the house as collateral. Take a 400k mortgage on a 200k house that ends up being repossessed, the bank sells the house for 200k then continues to chase down the customer for the difference of 200k.
Right, but in light of the question asked and to clarify for the OP, the banks are under no legal obligation whatsoever to “mark mortgages” to current house values as the value of the mortgage isn’t based on the value of the house but rather on the customer’s “promise to pay”.
Thank you, and I agree this was the theory in the past, but I thought the new personal insolvency law changes this? Does it not effectively add an element of non-recourse and “legal promise breaking” to irish mortgages?
Does it not ensure that the mark-to-market of the typical mortgage (i.e. someone without significant other assets to chase) is tied closely to the value of the house? or have I misunderstood the new proposals?
I really don’t see why Irish mortgage value is based on the promise to pay. Ignoring the irish law, anyone with sizeable negative equity and little other assets can threaten UK bankruptcy and walk away fully from the debt after one year.
Or they can emigrate to Australia with their other assets and after 6 years they can legally forget about the debt.
These significantly devalue the promise to pay.
I thought I heard something on the news about the troika forcing mark to market on Irish mortgages - not sure now though.
Perhaps need to separate balance sheet accounting from debt obligations from property value.
As I understand it, “mark to market” means that the bank values its asset (the loan) based on the current market value of that asset (loan), i.e. what it could get by selling the loan to a third party.
Loan value is some function of equity, ability to pay, and the legal position around repossession/insolvency.
When the government legislates to close repossession loopholes, the market value of the loan book increases and the banks appear more solvent.
When the government legislates to make bankruptcy less punitive, the market value of the loan book decreases and the banks appear less solvent.
The scenario you outlined is only likely to be taken up by a small minority of people (majority of property developers of course), as such I presume the auditors are satisfied that the provisions for bad debt which the banks will apply each year are adequate, obviously these provisions will increase in times like these and believe it or not, they must be based on statistics and evidence gathered to date.