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Friday, July 22, 2011

Various Causes of Mortgage Crisis

An interesting read.... (hat tip to Mankiw)

But, one thing I've learned that may have helped exacerbate the bubble (if one believes that theory - which I do)that I don't see really mentioned here is the fact that banks and loan originators often had direct and overly 'cohercive' relationship with residential appraisers, to the point where appraisers were often 'encouraged' to basically comp, say, home values associated with a higher-priced nearby neighborhood to what they are supposed to be appraising - to inflate the size of value/loan. And by the way, this was fairly common knowledge prior to the explosion of the crisis. . Luckily, the Dodd-Frank financial reform act has accounted for this and essentially is pushing the industry toward the use of middlemen....appraisal management companies that stand between the banks and the appraisers. More here.

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