Indicators of Collateral Misreporting

32 Pages Posted: 20 Sep 2014 Last revised: 22 Jul 2015

See all articles by Cem Demiroglu

Cem Demiroglu

Koc University, College of Administrative Sciences and Economics

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: June 24, 2015

Abstract

Recent studies use retrospective automated valuation models (AVMs) to investigate whether appraisals of collateral values associated with securitized residential mortgage loans were systematically inflated during the recent housing boom. In this paper, we provide evidence that high AVM pricing errors as well as selection bias in samples of completed loans, which are conditioned on relatively high appraisals, may generate the appearance of appraisal bias even when the original appraisals are unbiased estimates of the underlying value of the collateral. We present evidence that the estimated frequency of appraisal overstatement is quite sensitive to assumptions concerning loan denial rates as well as the magnitude of and the correlation between AVM and original appraisal pricing errors.

Keywords: AVM score, appraisal inflation, collateral misreporting

JEL Classification: G21, G23, R30

Suggested Citation

Demiroglu, Cem and James, Christopher M., Indicators of Collateral Misreporting (June 24, 2015). Available at SSRN: https://ssrn.com/abstract=2498480 or http://dx.doi.org/10.2139/ssrn.2498480

Cem Demiroglu (Contact Author)

Koc University, College of Administrative Sciences and Economics ( email )

Koc University
Sariyer
Istanbul, 34450
Turkey
90-212-338-1620 (Phone)
90-212-338-1653 (Fax)

HOME PAGE: http://https://sites.google.com/site/cemdemiroglu/

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

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