Well-Intended Swap Contracts Prove Detrimental Instead
Two decades ago, interest rates were up and real estate loan borrowers were failing to pay banks their dues. To prevent another rash of future foreclosures and non-payments, the swap was created.
According to CBRE, swaps were intended to “protect real estate loans with high loan-to-value (LTV) ratios — which typically have low interest rate cover — against rate rises.” Flash forward to the present, when the economic crisis has forced interest rates unusually low, and swap contracts are no longer looking as attractive as they were meant to be.
“The irony of this phenomenon is that swaps were intended as an instrument to protect investors from the risk associated with rising interest rates. However, at the peak of the market, no-one anticipated that we would enter such a prolonged low interest rate environment,” explains Philip Cropper, managing director, real e