The Influence of Contract Prices and Relationships on Collateral Valuation

Abstract

Prior evidence has shown appraised values of residential properties are biased, but the mechanism and motivation of appraisers to bias their estimates are unclear. We construct a database of 25.3 million comparable transactions selected and used by appraisers to estimate 6.5 million property values associated with a home purchase from 2013 until 2017. The primary source of introduced bias we identify is in the weights appraisers assign to individual comparable transactions after already adjusting for observable attributes. We find appraisers use unequal weighting to increase appraised values to match contract price for over 69% of properties if an otherwise equal weighting would have resulted in an appraised value under that amount. This unequal weighting resulted in an additional 23% of properties having an appraised value at least equal to contract price. Using appraiser-specific fixed effects, we show appraisers were most likely to apply differential weights to confirm contract price for the properties associated with financial institutions, loan officers, and real estate brokers they worked with most frequently. We discuss potential reforms to offset such biases in the conclusion.

Keywords: mortgage loans, collateral, soft relationships, big data

JEL Classification: G21, G28, K11, L85, R31