Winter 2009-2010, Vol. 34, No. 3
Analyst support from Ian C. Broff, CFA

Abstract: A missed assessment of real estate debt risk is the root cause of both the savings and loan crisis in the early 1990s and the mortgage-backed securities crisis currently observed in the marketplace. A high risk of probable default developed as aggregate debt increased above annual average increases in both gross domestic product (GDP) and Consumer Price Index (CPI) measures over a number of years. This article discusses how the probable risk of default increases each year when the loan aggregate growth rate is higher than the average rate of GDP and CPI, and explains why issuance years 2005, 2006, 2007 and 2008 have a high risk of probable default years in all real estate secured debt in U.S. markets. The author also offers a methodology to prevent the problem from occurring in the future.