Point of View The Serpent in the Garden

Someone once observed that every decade the real estate industry invents a new vehicle for wealth transfer between the inventors and their investors. During my career we have seen this drama play out many times. New wrinkles in capital markets often lead to disheveled portfolios. In the mid 1970s, major banks seized on the mortgage real estate investment trust (REIT) as a vehicle to make loans that were not presentable on their own books. What began as high leverage loans ultimately became construction financing, swing loans, bridge loans, and gap loans, all semantic clothing for what were poorly underwritten risks. The ultimate denouement always comes, and in that era it came in the form of rapidly rising short interest rates (does that ring a bell?). The banksponsored mortgage REITs of the day had borrowed short to lend long. Bankers who forget the first principle—keep a balanced book—nearly always have a bad experience.