In the market for German real estate finance at the end of 2001 a phenomenon could be identified that shows significant parallels to the shortening of credit supply in the US market in the early nineties, called the credit crunch. There are two basic reasons that explain the withdrawal of mortgage banks from the current events in real estate debt finance. Both are linked to a lack of risk identification in real estate investment. First, mortgage banks are engaged in a portfolio of bad real estate credits. In the past and today, banks do not receive information to price the true property risks. Especially from their money transfer to eastern Germany they still suffer of high deprecations in these engagements. The high impact of single properties can not be diversified. This is why banks were exposed to higher risks than they calculated in their market risk exposure. On the other hand, the preparation for Basel II indicates how sensitive risk have to be treated according to the new regulatory environment. This causes a split of relationship ties where real estate risks were not priced for decades. The result is a failure of all sorts of real estate finance in Germany. From the survey on institutional real estate investment behavior, it becomes evident that market participants ignore property risks and they do not have the instruments available to price these risks. This is why banks act so cautious in preparation for Basel II. Banks will have to find the instruments to either price these property risks or have intermediaries price them and include diversified securities into their holdings.
True intermediaries are not present in German real estate finance. Banks failed in their function to price risk and monitor the quality of investors in debt finance. In addition, a lot of direct finance from households to real estate investors as open-ended or closedended funds takes place. We suggest the introduction of a real estate investment banking function that offers true intermediation services. It monitors the risk pricing of real estate investors and places the securitized and rated risk exposure at banks or in the capital market to provide finance to capital seekers. Future real estate investment would be financed risk-adjusted and financing volumes could increase again.