Determinants of a foreclosure discount

Abstract

Using a dataset with individual appraisals of foreclosed apartments sold through auction in Stockholm, Sweden, the issue of selection bias and a potential overestimation of a foreclosure related discount on price is addressed. A mean discount of 7.9% with a corresponding median value of 9.5% is shown. A hedonic model is also applied. It is found that about half of the impact on price caused by a forced sale is attributable to the search process on the real estate market. These results contrasts from earlier research having explained a negative impact on price to seller motivational factors. These results provide insight towards the dynamics of a negative impact on price caused by a forced sale, and has the potential to allow stakeholders to model a potential discount in greater detail for individual foreclosed properties, and contribute to management of credit risk.

Racial disparities in unemployment benefits among U.S. mortgage borrowers during COVID-19

“…Our findings show that minority borrowers had a higher risk of experiencing both mortgage difficulties and other pandemic-induced hardships compared to Whites. As the pandemic abates, the geographic concentration of forbearance, foreclosure, and other health and socioeconomic problems may have lingering effects on the local housing market, such as foreclosure discounts, extensive subprime loans, and long-term vacancies (Barwick, 2010 ; Donner, 2020 ; Wang & Immergluck, 2019 ). Therefore, housing policymakers should prioritize assistance for minority mortgage borrowers, given that their experience of housing stress is intertwined with other hardships induced by the pandemic.…”

Mortgage Lending Valuation Bias Under Housing Price Changes and Loan-to-Value Regulations

“…The factors in vector X include homeowner participation in the foreclosure process, which can help reduce losses, along with credit risk, which lead to an increased risk of over-indebtedness (Melzer and Meltzer, 2017) or holdup issues (Agarwal et al, 2019). A low centrality of the foreclosed house relative to work or government institutions can plausibly influence the search process, thus reducing the probability of matching (Donner, 2020) and influencing the foreclosure discount. We also examine the valuation method effect by considering whether the bank employs an AVM estimate during loan granting.…”

Compensation and Socio-Economic Status of Borrowers in Foreclosure: Evidence from Swedish Micro-data

“…However, it may be formally challenged only in conjunction with an appeal against the auction itself. The appraisal is meant to reflect the market value for the foreclosed property as if it was sold on the open market in a regular arms-length sale (Donner 2020). The appraisers are professional, in most cases also certified, and external to the SEA.…”

“…Market value is the dependent variable in the regression model, while tax value is an independent variable. The appraised market value is a measure of the actual market value of the real property at the time of foreclosure as if it was sold in an arms-length voluntary transaction (Donner 2020). Market value appraisal is commissioned in every foreclosure auction case at the SEA.…”