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Oct 3 2007 9:45AM EDT

The Advisability of Real Estate Lending

Where was Mike Milken when I needed him? I'm a veritable milquetoast compared to him: my view is simply that buying a home isn't always a good idea, especially not when it costs less than half as much to rent as it does to buy. Milken, on the other hand, goes further:

It will be "quite a while before we have a robust housing market again," Milken said in an interview today. "The idea that any loan against real estate is a good loan has never been a rational thought."
The "basic assumption" that home prices will continually increase is wrong, said Milken.

I don't necessarily agree with Milken on the subject of real-estate loans: in general, I think that a real-estate loan with good underwriting – that is, a real-estate loan where the borrower can repay the mortgage out of his income – is likely to perform reasonably well. Occasionally, it won't: ask any Japanese bank which lent money against commercial real estate in the mid-80s. And, of course, there's no shortage of real-estate loans which are not well underwritten, both in the subprime sector and, more recently, in commercial real estate. But those are artifacts of bubbles, and I think that in the grand scheme of things, lending money against property is a good business to be in. After all, your mortgage is pretty much the last thing you're going to default on.

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