Cooking up a Crisis: The Capital-Valuation Connection in U.S. Real Estate Markets

Comparative Law Portuguese-American Perspectives, Vol. 3, 2016

Posted: 6 Dec 2016

See all articles by Andrea J. Boyack

Andrea J. Boyack

Washburn University - School of Law

Date Written: November 28, 2016

Abstract

If this was a cooking show, and we were preparing to demonstrate how to create a complex dish that I'll call "The 2008 Financial Crisis," we would start out by assembling our various ingredients. In this case, our ingredients would include sophisticated financial products, rating agency discretion, investor rating mandates, borrower credit assessments, bank regulations, and opaque accounting practices. Many reformers today focus on one or more of these ingredients, calling for greater government oversight and regulatory reform, and governments have attempted to respond. But related in one way or another to each such factor is the volatile collateral pricing, which supported these extensions of credit in the first place. In assessing the repayment risk associated with making a mortgage loan, lenders evaluate two factors: credit and collateral. These factors are related. Although lenders look primarily to a borrower's ability and willingness to pay in order to assess the likelihood of loan repayment, sufficient collateral values can offset the risk of lending to lower-credit borrowers. When supported by valuable collateral, loans to riskier borrowers become less risky. When borrower credit fails, market evaluation of risk hinges on accurate real estate valuations. The "sharp corrections in housing markets" caused by over-estimation of property values provided a "trigger" for the financial crisis. No analysis of proposed legal solutions is complete without considering the ingredient of values and value perceptions.

Suggested Citation

Boyack, Andrea J., Cooking up a Crisis: The Capital-Valuation Connection in U.S. Real Estate Markets (November 28, 2016). Comparative Law Portuguese-American Perspectives, Vol. 3, 2016. Available at SSRN: https://ssrn.com/abstract=2876806

Andrea J. Boyack (Contact Author)

Washburn University - School of Law ( email )

1700 College Avenue
Topeka, KS 66621
United States

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