Contract kiting may lead to which of the following issues for the financial institution?

Contract kiting involves the manipulation of contracts, typically in real estate transactions, where an individual might use one contract to create the appearance of a property’s value being higher than it is. This practice can create a deceptive situation where financial institutions may extend loans based on inflated property values. As a result, borrowers who have engaged in contract kiting might struggle to meet their loan obligations, which could ultimately lead to loan defaults.

This situation is particularly concerning for financial institutions because it can result in significant financial losses and increased risk management challenges. The potential for loan default highlights the importance of verifying the accuracy of property appraisals and the legitimacy of transaction documents. Financial institutions, therefore, need to be vigilant in assessing the integrity of the information presented to them to mitigate the risk associated with such deceptive practices.