Spring 2002, Vol 27, No 1

Abstract: There is now good reason for lenders and borrowers in the real estate finance market to be aware of and consciously concerned with systemic risk. Whatever science we have in the form of models that seem appropriate to the task of evaluating such risk should, of course, be used. It is likely, however, that what will turn out to be the most effective way of dealing with it will involve a good deal of subjective analysis. And a key element in such an analysis will be an understanding of how the economy is evolving and what this implies with respect to the probabilities that have bearing on loan performance. Such understanding should give rise to sensible subjective assessments that in the decisions they underpin should translate into reasonable risk premiums. This, of course, implies upward pressure on loan rates in this market. While it may not turn out exactly as it is portrayed in the textbook presentations of operation of efficient financial markets, the direction of change should be much the same.