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Trust must be completely restored in nationís mortgage delivery system

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One of the most critical pre-conditions for restoration of healthy commercial and residential real estate markets is the restoration of trust. For example, underwriting standards are unduly constraining lenders due to lenders’ fears and uncertainty -- and overbearing regulatory scrutiny -- all flowing from the mortgage market meltdown. The collapse of mortgage markets represented a system-wide failure in which every participating industry played a part, ending in a crisis of confidence and the loss of hundreds of billions of dollars in investor equity and government (taxpayer) bailouts.

Investors in mortgages and mortgage-related securities, the ultimate providers of a majority of real estate financing, relied heavily on traditional ratings and other assurances of credit quality, only to be victimized personally as well as professionally, because they were responsible for losing so much of other people’s money.

Not until faith is restored in this nation’s mortgage delivery system -- a process likely to take three or more years -- will lending and investing become significantly more plentiful at underwriting standards that make sense. Further, while borrowing costs for real estate have remained near historic lows, my interpretation is not that investors have regained faith in the quality of the collateral and borrowers as much as that investors around the world no longer trust in our mortgage securities having the quality and other characteristics promised in their documentation. The flight to quality no longer includes MBS or CMBS in addition to U.S. government securities.

Another important instance of where real estate-related investors and lenders have lost trust and confidence is in central banks, and even more importantly in politicians and political systems at all levels of government -- in many developed countries across the globe.

Central banks are expanding their nations’ liquidity at unprecedented rates, and intruding into capital markets employing programs on a short-term basis that are destined to provoke inflation and further destabilize economic and financial activity in the long run. At the same time, government officials without the political will or leadership skills needed to gain public support for raising taxes or implementing other policies designed to pay for federal, state and local priorities in this country, instead rely upon borrowings to fill gaps between revenues and spending.
While some rationalize government borrowing as an important public policy tool responding to voters’ demands for services, the reality is that borrowing also can be interpreted as a barometer of failed fiscal (tax and spend) policies.

To some extent, voters only have themselves to blame for this situation. On the one hand, a majority of Americans have lost confidence and faith in Congress. On the other, voters think that their individual representatives in Washington are doing a fine job. In short, voters recognize that on the issue of wide-ranging public policies (taxing and spending) Congress does a poor job, while at the local level individual congressmen and women get (re)elected because on selected narrow issues they are able to achieve successes.

What this country, and the real estate and mortgage finance industries need is less focus on easier-to-achieve narrow issues and more leadership on more-difficult-to-achieve broader socio-economic issues -- properly the purview of elected representatives at all levels of government.

Civic and business leaders also share some responsibility for a loss of trust in our institutions and markets. Over decades, it seems, the willingness and ability of our civic and business leaders to contribute their best thoughts and efforts to important societal issues has been eroding, ceded to elected and appointed officials in the political arena. Even to this day, as economic malaise and financial crises extend from Main Street to Wall Street and the world at large, the dearth of credible civic and business-thought leadership on broad public policy issues and strategies adds to, rather than detracts from, major problems not easily solved.

Real estate and mortgage markets are not the only areas hurting in this country, to be sure. Be that as it may, leaders in these industries have a responsibility to expand their horizons and look at what is good for their entire industries and for society as a whole, not just their personal or business priorities.

No one says that this is an easy proposition, but it is a necessary one. While it may well be true that real property is all about location, location, location, the financing of real estate derives from a global pool of capital, so what happens elsewhere in the United States or in the world does affect real estate in San Diego.

Executives cannot forsake their own business to concentrate exclusively on larger societal issues, but there ought to be a better balance than exists today. And in achieving that balance, each of us should consider where we might have an opportunity -- if only at the local level -- to demonstrate real social, economic and political influence for the greater good of the region. In so doing, hopefully we will contribute to a restoration of trust and confidence in the future of our nation and the city we all treasure.


-Riedy is the executive director of the Burnham-Moores Center for Real Estate at the University of San Diego

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