Collateral Misreporting in the RMBS Market
59 Pages Posted: 24 Aug 2017 Last revised: 24 Apr 2018
Date Written: April 12, 2018
Securitized mortgage appraisals routinely target pre-specified valuations, 45% of purchase loan appraisals exactly equal purchase prices, and appraisals virtually never fall below purchase prices. As a result, appraisals exceed automated valuation model (AVM) valuations 60% of the time and are biased upward by an average of 5%. Appraisal bias predicts loan delinquency and RMBS losses and is priced at the loan level through higher interest rates, but it has essentially no impact on RMBS pricing. Selection bias simulations and unfunded loan application appraisals indicate that appraisal bias is intentional, and appraisal bias varies across loan officers, mortgage brokers, and appraisers.
Keywords: appraisal bias, misreporting, mortgage, mortgage-backed security
JEL Classification: G21, G23, R30
Suggested Citation: Suggested Citation