Appraising home purchase appraisals

Abstract

Home appraisals are produced for millions of residential mortgage transactions each year, but appraised values are rarely below the purchase contract price: Some 30% of appraisals in our sample are exactly at the home price (with less than 10% of them below it). We lay out a basic theoretical framework to explain how appraisers' incentives within the institutional framework that governs mortgage lending lead to information loss in appraisals (that is, appraisals set equal to the contract price). Consistent with the theory, we observe a higher frequency of appraisal equal to contract price and a higher incidence of mortgage default at loan-to-value boundaries (notches) above which mortgage insurance rates increase. Appraisals appear to be less informative for default risk measurement compared with automated valuation models.

House Price Markups and Mortgage Defaults

“…The negative coefficient on the markup is consistent with the pattern shown in the bottom panel of Figure 4. The coefficient on the censoring dummy is positive, indicating heightened risk, consistent with Calem et al (2021). Model 3 adds the same list of covariates as in the benchmark model.…”

“…For purchase mortgages, 37% of all appraisals are exactly equal to the transaction price and 49% are within 0.5% of the transaction price. Previous research has shown that an appraisal nearly equal to the contract price is an indicator of heightened risk (see Nakamura 2010, Agarwal, Ben-David, and Yao 2013, Calem, Lambie-Hanson, and Nakamura 2015, Ding and Nakamura 2016, Calem et al 2021.…”

“…Average rather than idiosyncratic conditions should be stronger driving factors for determining collateral value. Moreover, manually performed (human) appraisals may be subject to bias as reported by a growing set of studies in this area (see Nakamura 2010, Agarwal, Ben-David, and Yao 2013, Calem, Lambie-Hanson, and Nakamura 2015, Ding and Nakamura 2016, Calem et al 2021. To confirm the existence of appraisal bias in the sample, the 3.…”

Collateral Misreporting in the Residential Mortgage-Backed Security Market

“…This contrasts with owner-occupancy status misreporting, which evidence fromPiskorski et al (2015) suggests is made earlier in the origination process, possibly by the borrower or broker originating the loan on behalf of New Century.13 We treat appraisals as equal to purchase price if they are within 0.01% of one another. Of the appraisals we classify as being equal to purchase prices, 99.3% are exactly equal even before this rounding convention.14Cho and Megbolugbe (1996) andCalem et al (2018) find similar evidence of purchase price appraisal targeting in other samples, which suggests that it is a long-standing and widespread practice.Conklin et al (2019) also document that New Century purchase appraisals cluster at and above purchase prices.15 The average AVM valuation is 1.7% below purchase price, which suggests that New Century loans (and perhaps nonagency loans more generally) tended to have collateral with relatively high purchase prices compared with other similar properties.16 In the internet appendix, we replicate this result in Figure IA.8(a), and we regress appraisal difference on LTV and an indicator for round LTV ratios in TableIA.3 with similar results. 17 In Internet Appendix Figure IA.9, we confirm that results are similar in restricted samples of unfunded loans with application dates that precede appraisals and without applications from mortgage brokers.…”

“…6 Agarwal et al (2015) identify appraisal inflation in conforming mortgages using repeat sales and find that it is related to financial constraints and predicts subsequent default. Cho and Megbolugbe (1996), Calem et al (2018), and Eriksen et al (2018Eriksen et al ( , 2020 find evidence of inflated appraisals in purchase loans. Tzioumis (2017) finds that appraisal inflation is unrelated to appraiser work volume and employment prospects.…”