The new York Times printed a useful article regarding mortgage backed bonds and the issues facing the Federal Government and the banks themselves in valuing these securities. While this might seem an esoteric topic, it lies at the core of the problems in the banking system. This doesn't affect the Maui real estate market directly in a major way, but it does impact buyers' thinking. Here are some key snippets:

But getting this right will not be easy. The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency. The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors. The bond analyzed by S.& P. is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.

That sort of price disagreement is just inconsistent with a liquid market. The bid and offer should be measured in fractions of cents. When we see opinions on value begin to narrow, that will be an important indicator the mortgage market is on the rebound. The entire article is worth reading.. For details contact us!