Magazine article The RMA Journal

Not Exactly Fraud ... and Other Tomfoolery

Magazine article The RMA Journal

Not Exactly Fraud ... and Other Tomfoolery

Article excerpt

Let's assume you have a fair degree of wealth. What would you pay for membership in a very exclusive vacation club? You can stay at any of its luxurious destinations anytime you like. The place is stocked with groceries when you arrive. If you booked a ski resort, lift tickets are there waiting. Best of all, after 18 months, you get the membership fee back if you want to quit. Would you pay $85,000? How about $500,000? A million?

Well, some well-heeled folks paid dearly when Tanner & Haley Resorts went bankrupt in August, and its unsecured creditors did too. The company meant well, but it just had some problems when too many people expected it to deliver what it promised. There's more to it, of course, but you get the idea. In a way, it's just another example of real estate speculation gone awry. Unfortunately, many of us are seeing other speculative projects starting to feel the heat of the current environment, and it could just be a waiting game to see who gets burned first.

The consumers in the Tanner & Haley case will likely be able to absorb their losses. Those affected by other types of real-estate-related risks, such as interest-only adjustable rate mortgages, probably won't. The distress of the consumer as interest rates rise will result not only in foreclosures but also in hits to the reputation of the financial institutions involved. As we know, the markets aren't particularly forgiving of mistakes. And the regulators are demonstrating their growing concern for banks' retail policies and practices as well.

As any risk manager can tell you, finding that balance between risk and reward is no one-shot deal, because both risk and reward fluctuate almost daily. …

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