4 ms·

The system you describe puts 100% of the onus of appraisal onto the borrower. It's in the bank's best interests to inflate the value of the home as much as poss

The system you describe puts 100% of the onus of appraisal onto the borrower. It's in the bank's best interests to inflate the value of the home as much as possible and get a borrower on that inflated amount, because now, regardless of what the property is actually worth, the borrower is on the hook for the full amount. The bank is normally the one who approves the appraiser, which is a clear conflict of interest. In our system, ideally everyone is best served when the appraiser is neutral and competent because the borrower doesn't over pay, and the bank isn't exposed to much risk since the collateral can actually cover the obligation. The system you describe has a huge loophole because lenders hold all the cards and could easily collude on the sly with appraisers to drive prices up at the expense of the individual. It wouldn't even need to be an explicit collusion -- sort of like the default swap stuff, no individual player (who could see that the system was a sham) had any incentive to bring it down. On the contrary, they had incentive to keep up the bullshit in order to make their numbers. A similar pressure could result with laws that heavily favor the lender.

jacquesm 17y ago
There is a possible upside to the borrower for an inflated valuation too. As long as the market is rising the borrower can point to the increased valuation since the property came on the market and use that to 'pass the hot potato' to the next sucker. Plenty of people made tons of money in this way in the '96 to 2000 period, especially in larger cities where property prices tend to go up out of proportion.
nfnaaron 17y ago
"The system you describe has a huge loophole because lenders hold all the cards and could easily collude on the sly with appraisers to drive prices up at the expense of the individual." That happens here in the US. Appraisers I've talked to have been pressured to raise the value of the property, so the transaction will happen. The seller wants to sell it for X. The buyer wants to buy it for X. The two agents and the bank want the house sold for anything at all. Buyers and sellers should choose and pay for their own appraisal, even if the bank requires the buyer to pay for an appraisal for the bank.
axod 17y ago
Lenders typically lend up to a maximum % of the purchase price - 90% is typical. So if you default on the loan, they'd have to sell it for less than 90% of the value for you to owe them anything on it. If you default though, it's their home, they're free to sell it for whatever they like. As far as the actual house sale goes, the bank/lender has little/no power in the UK. If they don't want to lend the money on the house there are others that will. The price is decided by the seller/estate agent, and the obviously the buyer. The main critera the bank has is that you pay a % of the purchase price - they'll lend typically only up to 90%-95% or so. I like the UK system personally. I think it's responsible. Not to mention the silliness of yearly home tax?! in the US and other craziness.

jacquesm 17y ago

There is a possible upside to the borrower for an inflated valuation too. As long as the market is rising the borrower can point to the increased valuation since the property came on the market and use that to 'pass the hot potato' to the next sucker. Plenty of people made tons of money in this way in the '96 to 2000 period, especially in larger cities where property prices tend to go up out of proportion.

nfnaaron 17y ago

"The system you describe has a huge loophole because lenders hold all the cards and could easily collude on the sly with appraisers to drive prices up at the expense of the individual." That happens here in the US. Appraisers I've talked to have been pressured to raise the value of the property, so the transaction will happen. The seller wants to sell it for X. The buyer wants to buy it for X. The two agents and the bank want the house sold for anything at all. Buyers and sellers should choose and pay for their own appraisal, even if the bank requires the buyer to pay for an appraisal for the bank.

axod 17y ago

Lenders typically lend up to a maximum % of the purchase price - 90% is typical. So if you default on the loan, they'd have to sell it for less than 90% of the value for you to owe them anything on it. If you default though, it's their home, they're free to sell it for whatever they like. As far as the actual house sale goes, the bank/lender has little/no power in the UK. If they don't want to lend the money on the house there are others that will. The price is decided by the seller/estate agent, and the obviously the buyer. The main critera the bank has is that you pay a % of the purchase price - they'll lend typically only up to 90%-95% or so. I like the UK system personally. I think it's responsible. Not to mention the silliness of yearly home tax?! in the US and other craziness.