a. Comment on the finance company’s ethics in making loans in excess of a home’s appraised value. 

b. What are Sarah and Joe’s options in their current situation? Is there a way they can proceed with building their dream home?

Sarah and Joe own a small home that they would like to sell in order to build their dream home. Their current home has a mortgage and needs extensive repairs to make it marketable. A local loan company is offering home equity loans equal to 125 percent of a home’s value. Since Sarah and Joe have good jobs and can make the additional home equity loan payments, they easily qualify for the 125 percent home equity loan. The entire home equity loan is required to complete the repairs and upgrades to their home.

To their shock, they find that, even after the upgrades, they are unable to sell the home for enough to repay the mortgage and the home equity loan. In other words, they have negative equity in the home.