Collateral Misreporting in the Residential Mortgage-Backed Security Market

Management Science, 67 (5): 2729-2750 (2021).

51 Pages Posted: 24 Aug 2017 Last revised: 26 May 2021

See all articles by Samuel Kruger

Samuel Kruger

University of Texas at Austin - Department of Finance

Gonzalo Maturana

Emory University - Goizueta Business School

Date Written: February 27, 2019

Abstract

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 5% higher than AVM valuations on average. High appraisals and indicators of appraisal targeting predict loan delinquency and RMBS losses and are priced at the loan level through higher interest rates, but have essentially no impact on RMBS pricing. Selection bias simulations and unfunded loan application appraisals indicate that high appraisals are intentional. The extent to which appraisals exceed AVM valuations varies across loan officers, mortgage brokers, and appraisers; and high appraisals are associated with more repeat business for appraisers, potentially incentivizing appraisers to inflate their appraisals.

Keywords: appraisal bias, misreporting, mortgage, mortgage-backed security

JEL Classification: G21, G23, R30

Suggested Citation

Kruger, Samuel and Maturana, Gonzalo, Collateral Misreporting in the Residential Mortgage-Backed Security Market (February 27, 2019). Management Science, 67 (5): 2729-2750 (2021)., Available at SSRN: https://ssrn.com/abstract=3023313 or http://dx.doi.org/10.2139/ssrn.3023313

Samuel Kruger

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Gonzalo Maturana (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

HOME PAGE: http://www.gonzalomaturana.com/

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