Bubble Economy And Real Estate Loans
Major cause of default risk of commercial mortgages is a bubble economy. An oft-cited definition of "bubble" is given by Stiglitz, as follows: "If the reason the price is high today is only because investors believe that the selling price will be higher tomorrow - when" fundamental " factors do not seem to justify such a price - then there is a bubble ".
The main reason for the bubble and banking problems connected to excessive expansion of bank credit is fueling builds up in real estate prices and rising credit risks. The acceleration of economic growth and demand for real estate is triggered by "euphoria", as families and businesses to anticipate these new features, "prices will rise and increase their willingness to participate in debt-financed investments.
There is something special about home loans: price increases that generate "extra" security that can be used for other loans. The rising price of real estate held by companies leads to an increase in the value of the asset on their balance sheets. These gains result in easier access to bank loans, which can be applied to new productive investments, or more speculative real estate investments. For various reasons, lenders may rely on bad trend analysis, which assumes that current market conditions continue in the future.
Thus, the increased real estate prices, relative to fundamental improvements in the economic outlook or a decrease in real interest rates, may lead to increased debt. Thus, bank credit may also be a source of upward pressure on housing prices, especially if banks antelainaus relax. Thus, creditors can take a very tolerant antelainaus at the top of the cycle and a antelainaus extremely conservative through the cycle.
At the top of the bank of the cycle may have borrowers who are exposed to a sharp fall in prices. These borrowers are known as newcomers to the housing market and are particularly vulnerable because when prices were near the ranges provided and, finally, expect the rally in prices and this trend will continue. These borrowers experience the highest loss of capital and a higher risk of default. When these borrowers face to face with the possibility of default, are also likely to take a risk (moral hazard).

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