Bob Carlson

July 15, 2013

Appraisers and the Financial Crisis

Filed under: Financial crisis — Bob @ 8:20 am

Most people overlook some pretty basic explanations for the financial crisis. It boils down to regulators not constraining certain excessive business practices. Take a look at this post, in which William Black points out that appraisers told Washington they were being pressured to inflate home appraisal to justify higher loan amounts. All the controls that should have been in place weren’t in place.

Fraudulent loan origination creates a “Gresham’s” dynamic (bad ethics drives good ethics from the marketplace or profession because cheaters prosper) will be created among lenders.   The CEO of lenders that follow the fraud “recipe” can count on three “sure things.”  The lender will report exceptional income in the near term.  The controlling officers will promptly be made wealthy by modern executive compensation.  The lender will (later) suffer severe losses.  The controlling officers of honest lenders will report far lower income and receive far less compensation.  The CFO will rightly fear losing his job.  This turns market forces perverse and makes accounting control fraud surge.

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