We call it "fantasy financing" and it is not peculiar to America.
A property is valued, on paper, at Five Hundred Thousand Dollars.
It may stand on what can be called "negative dirt",(meaning the
area is not desirable) or be valued by the square footage with no
reference to what is encompassed in that footage.
In a real assessment, (what a purchaser would actually pay),
the value is One hundred and fifty thousand dollars.
Banks and other lenders, read the on paper valuation, and
act accordingly.
Hence Banks and other lenders wind up with a huge portfolio of unsellable
properties. The properties are costing the lender a great deal of money
to simply manage. Hence that property which would have sold for perhaps
one hundred and fifty has cost and is costing the lender sums so that to
'break even' it would have to sell for six hundred thousand dollars.
This is the root cause of the melt down in the housing market; fantasy
financing. It happens periodically. It is predicable.
It happens when people can purchase a home, and seeing values increase
decide to speculate, purchase other properties using their home as
security. Those who get in early
and get out, make money. Those who
get in late, lose everything.
Wise advisors will always say something to the nature;
"Whatever you are going to purchase, have twice as much money
as the purchase price."
Always buy less than you can afford. In this way, you are sure to
own what you buy.
Never take a loan with a "variable" interest rate. Always know
exactly how much you will be paying for the length of the loan.
If not, don't borrow, or don't borrow under that scheme.
If you have X dollars in the bank you can use as security for a loan,
and wish to use that loan to purchase a home, all you stand to lose is
the money in the bank, not the home.
Never mortgage the house you live in to buy another premises.
The house the Bank took, which is valued, on paper, at five hundred
thousand dollars, will eventually sell for one hundred thousand
dollars in a "fire sale".
The purchaser will get a "super bargain". As property begins
to appreciate, the owners might sell it for three hundred
thousand dollars.
And then another "boom" will begin.
