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Homework answers / question archive / Prior to 2008, mortgage lenders required a house inspection to assess its value, and often used the same one or two inspection companies in the same geographical market
Prior to 2008, mortgage lenders required a house inspection to assess its value, and often used the same one or two inspection companies in the same geographical market. Following the collapse of the housing market in 2008, mortgage lenders required a house inspection, but this was arranged through a third party. How does this illustrate a conflict of interest similar to the role that credit-rating agencies played in the global financial crisis?
A- Inspection companies may have provided overly optimistic assessments of home values to ensure continued work in the future.
B- This situation does not illustrate any conflict of interest, as the services provided by credit-ratings agencies and home inspection companies are unrelated.
C- Fees for home inspections may have been unreasonably high to ensure high profits for the inspection company.
D_ Mortgage lenders may have wanted to increase home sales without assuming the additional costs to add more inspection companies.
A- Inspection companies may have provided overly optimistic assessments of home values to ensure continued work in the future, to illustrate a conflict of interest similar to the role that credit-rating agencies played in the global financial crisis
Explanation:
Many of the mortgage lenders face the same problem of moral hazard that is asymmetric information in the market, which leads to a conflict of interest. To overcome the problem faced by mortgage lenders, they require housing inspection that is arranged by the third-party, and for this, mortgage lenders should provide optimistic assessments about the home values to get ensured continued work in the future by the investment companies.
