Re: Japan

["廖子光 HenryC.K.Liu 郭??" <hliu@xxxxxxxxxxxxxx>]

"J. Barkley Rosser, Jr." wrote:

>      My understanding is that a lot of the overblown loans
> made by Japanese banks in fact had land as the main
> collateral.  Because of BIS rules supposedly these are
> supposed to be currently valued, but I have little doubt
> that the lag in adjusting has been much slower than the
> lag in the decline of actual land values.

The Japanese real estate market, with much Bank accomplice, sustains a high
price at the expencse of liquidity.  Banks sell small properties to each other
to establish a price, while large properties remain without market. Its the same
principle as an IPO lock up to maximize market capitalization value.  Much Asia
real estate employs the same manipulation.

>
>      In any case, what makes a bad loan is nonpayment
> of interest, not the decline in value of the initial collateral.

Until the market vlue falls more than loan/equity spread, oftern as little as
10% on a 90% loan.  At this point the incentive of the borrower to just walk
away from the loan increases. to prevent this from becoming widespread, banks
arrange phoney buyers to support the underlying value of the collateral by
establish a price from "similar" psroperties, so that the appraisers can do an
"honest" appraisal. Even in boom times, developers arrange pre-completion
insider rentals or sales to show that the project has a completion market value
in excess of the construction loan, so that the permanent mortgage can get
better terms, such as 200% of the initial development cost. In real estate, it
is common knowledge that there are no dumber people than low-paid bank credit
officers who serve on loan committees administrating bank formula.

Henry