During the mortgage crisis of 2008-2009, there was a proposal to suspend market-

Question

During the mortgage crisis of 2008-2009, there was a proposal to suspend market-to-market accounting. Why was this proposal brought up and why was it ultimately not accepted?

I think it was suspended because the accounting rules require rules wanted companies to adjust the value of marketable securities to their market value. Not sure please help me get a better understanding why it was brought up and not accepted.

If your answer is cited please disclose this information! I'm trying to get a better understanding!

Explanation / Answer

Reasons for suspension of Market to Market Accounting

1)The higher fees and better rate of return for investors in "sub-prime mortgages"(mortgages made to people who would not qualify for a standard 15 or 30-year mortgage) created a huge demand for these investments. This pressure caused financial institutions to change their regulations so that they could write as many of these mortgages as possible. When the risky mortgages started to fail, banks and investment firms were so over-leveraged (having too much debt and not enough cash) that they began to go bankrupt, starting with Bear Stearns in July of 2007. With so many firms involved, banks stopped lending money altogether to avoid making loans that could not be repaid. This led to the "credit freeze" of September 2008 and the request for U.S. government assistance.

2) When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending.

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