What a surprise! A study by the Federal Reserve Board of New York found that speculative investors in real estate played a large part in the quick run-up and subsequent devaluation of housing prices, and are responsible for more of the financial crisis than previously thought. Wow! Turns out lenders were the victims after all, right?
Wrong. While the facts are true, this real estate investment madness is something we knew about, and in fact, many lenders encouraged. When lending guidelines permitted a borrower to have 20 financed properties and still qualify for more, how can it come as a surprise that people were speculating on housing?
Smart risk-taking involves understanding the downside as well as the upside. Simple logic tells us that adding enormous amounts of mortgage debt that’s partially covered by rent is not a good idea if you are looking to avoid defaults.
Where, you ask, were the credit policy people? Why didn’t they put a halt to this? Actually, many were yelling as loudly as they could. They were joined by the folks running quality control. Unfortunately, their warnings were drowned out by the sound of the cash registers ringing up sales.
Even the regulators acknowledge this failure and state that it has to change. The bottom line: risk management and quality control have to have an equal and respected place at the management table if we all want to keep eating.
