I need help understanding the Market to Market problem.

If the banks are allowed to forgo the market to market accounting rule, that requires banks to value their mortgage-related assets at current market prices, what do they value you them at. Or is it the fact that they have to devalue their over all holdings by the amount of the write-downs taken on mortgage assets?

In other words, the banks would be doing much better on paper if the they did not have to adjust their books for the devalued home values of the mortgages they are holding? And does that include all mortgages or just the defaulted ones?

Thank you in advance for the explanation. I am just trying to understand all of this.