I am all for taking calculated risks but unfortunately very
often people confuse an educated risk with foolish irresponsible decisions
especially in our time when a sense of entitlement dominates a significant part
of our society.
We all need to make our part to preserve the status of the real
estate market as ‘the’ or at the very least one of the safest investments. I
love selling and buying real estate property and the very last thing I would
want to see is another chaos in the mortgage industry that would ruin with a
domino effect fashion the real estate market.
I hope that this time even buyers could think in more realistic
terms and act wisely in what they can really afford even if greedy
irresponsible mortgage brokers approve a loan that everyone knows that borrower
cannot afford.
It was the Spanish philosopher and novelist Santillana who said
that the one who refuses to learn from history is doomed to repeat its
mistakes.
Wall Street’s short memory fueled by the unrealistic
expectations of an entitled generation could bring us back to risky mortgages.
Hiten Samtani in an article for the
Real Deal writes about how with the resurgent real estate market, Wall Street
is back to its old tricks, weaving together the same type of complicated
financial instruments and mortgages that wreaked havoc during the housing bust,
the New York Times reported.
Investor optimism coupled with a strong real estate market and
the Federal Reserve’s policy of maintaining low interest rates has allowed
banks to revive these instruments, known as structured financial products. The
safest of these investments can offer interest rates almost twice those paid
out by U.S. Treasury securities, according to RBS securities, which was a
previous player in the structured financial products game. But these
investments have once again managed to avoid the scrutiny of government
regulators.
“All of this seems like a fairly quick round trip,” Manus
Clancy, a managing director at Trepp, a research firm that focuses on
commercial real estate, told the Times. “You are seeing a fair number of sins
being forgiven.”
Indeed, so far this year, banks have issued $33.5 billion on
commercial mortgage-backed bonds, a slight increase from levels seen in 2005,
when the real estate market was booming, according to Thomson Reuters data seen
by the Times.
Banks are attempting to put investors at ease through steps
designed to make this generation of structured products safer than its earlier
iteration, but regulators and credit rating agencies have cautioned that the
extra protections are already easing up.
“The players in the business are generally the same as they were
before,” Tad Phillips, a commercial real estate analyst at Moody’s rating
agency, told the Times. “Because it’s the old players, they know how to push
the boundaries.”
And the makeup of these structured products remains as
labyrinthine as it once was. A pool of loans — whether home mortgages or
corporate loans — are mixed together into bonds ranked by levels of risk.
If the core loans default, the riskiest bonds take the first hit, and so on and
so forth. The bonds at the top of the totem pole could remain unscathed until
enormous sums of money are lost.
Last time around, when real estate prices dropped unexpectedly,
investors took a tremendous hit from these types of structured products and the
ripple effect was felt throughout the financial system. At the time, investors
complained that the complexity of these products had made the risk less
apparent. * Wall Street
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