Market Uncertainty: Mortgage Meltdown Fallout!
SIV Funds: Should they consolidate losses on the books of the parent and take the losses sooner than later?
How will FASB Rule 157 (Nov. 15, 2007) affect market losses? Effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. Earlier application is permitted if the entity has not yet issued interim or annual financial statements for that fiscal year.
How will FASB Rule 159 affect the “Fair Value” of financial assets? Effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. No entity is permitted to apply the Statement retrospectively to fiscal years preceding the effective date unless the entity chooses early adoption. The choice to adopt early should be made after issuance of the Statement but within 120 days of the beginning of the fiscal year of adoption, provided the entity has not yet issued financial statements, including required notes to those financial statements, for any interim period of the fiscal year of adoption. This Statement permits application to eligible items existing at the effective date (or early adoption date).
Asset Devaluation Creates Market & Loss Extremes, Which Can be Avoided!
Extremes caused by ‘asset devaluation’ is the unnecessary enemy.
The fact that the financial debate in the USA during July and August 2007, is whether a “secondary mortgage market, non-agency paper market, and/or the commercial paper market exists or whether it is currently functioning or not" should be compelling evidence that the solutions, short and long term must include reducing "market(s) uncertainty. The fact that there have been times of "no bids" on these markets during such time compels us all to search for safeguards from extremes and mandates congressional action to supply “market certainty”.
Wall Street learned its lesson from the dot com bust. Valuations fell. Margin calls begot margin calls. Before anyone could think sensibly, the market structure itself acted to co-create intolerable market devastation. Thereafter, Wall Street implemented a new series of market structure reforms; a system of refined checks and balances, a preset and predetermined contractual and systemic remedy that limits markets devastation. The exchange will automatically shut down if markets move downward in preset excessive amounts. It works. At least it’s better. The financial markets have maintained stability even in the face of terrorism. These preset provisions reduce extremes in market devaluation.
Market valuations are key in avoiding extreme market swings. In July and August, 2007, as a result of the mortgage default and foreclosure meltdown, the stock market has experienced extremes not seen since the dot com bust and worse. Non-agency paper and commercial paper markets all but disappeared resulting in “no bids”. The credit crunch and liquidity meltdown went into full swing and is now continuing and underway. This is a yet another warning that the all markets are connected, worldwide, and that ‘refined regulation’ is necessary.
The fact that shortly before the recent stock market meltdown, the exchange took away the “DOWN TICK RULE” is nothing less than shocking. Normally, the down tick rule will not allow traders to ‘bet on the down’ or ‘go short’ when the market is ticking downward. One could only bet on the down when the market was in an ‘uptick’ position. The recent extreme volatility and losses in the market were exacerbated by the removal of the ‘down tick rule’ during the recent market sell off. This caused greater losses in market valuations, triggering margin calls and further harming the stock, credit and real estate markets.
Red Flag Warning: Homeownership! Extremes caused by ‘asset devaluation’ is the unnecessary enemy.
Homeowners Asset Devaluation: When distressed homeowners sell homes ‘short’ (short sale) below market (below the mortgage balance due), or let the homes sell at foreclosure, the local real estate market devalues significantly. Since appraisals are based upon recent local sales, all local like-kind real estate suffers asset loss devaluation. The markets feed off of this phantom devaluation and prices fall to extremes. Even though, falling prices of ‘homes’ do not automatically trigger ‘margin calls’ as in stock markets, this devaluation erodes ‘equity’ and limits or precludes homeowners from refinancing, or using their home to finance growth in the general economy; not to mention the expected loss of 2.2 million homes for those families.
TID - Truly Intelligent Disclosures, SHILO - Safe Harbor Intelligent Loan Options and FMII - Foreclosure Mortgage Insurance Investment Funds created by Richard Ivar Rydstrom, Esq. and published by the 110th Congress are the answers to fashion solutions that avoid extreme market or asset devaluations. Mortgage lenders can find solution assistance at http://hotneutral.com. More information as published by Congress can be found at the House Ways & Means.
Foreclosures Orange County California Report August 2007
Foreclosures USA - National Report