Relational Contracts, Reputational Concerns, and Appraiser Behavior: Evidence from the Housing Market

47 Pages Posted: 29 Nov 2017

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Changcheng Song

National University of Singapore (NUS)

Vincent Yao

Georgia State University - J. Mack Robinson College of Business

Date Written: November 24, 2017

Abstract

We first document that 42% of appraisals are at or near the contract value, while only 7.5% are below the contract value. Next, we study possible explanations for this phenomenon. We analyze the length of the relationship between the appraiser and lender in relation to the quality of the appraisals by exploiting the appraisal contingency clause in the sales contract. We find that appraisers are rewarded for delivering “high-quality” appraisals that facilitate housing transactions and punished for “low-quality” appraisals that are disruptive. When the long-term relationship between appraisers and lenders is broken down under the new laws, there are fewer at- and above-contract appraisals. We also find these favorable appraisals have a significant and positive effect on loan approval, a negative effect on the note rate, and the loans associated with them have higher default and prepayment risks.

Keywords: relational contracts; appraiser; bunching; reputational concern; moral hazard; third party

JEL Classification: G21; G28; R21; R31

Suggested Citation

Agarwal, Sumit and Song, Changcheng and Yao, Vincent, Relational Contracts, Reputational Concerns, and Appraiser Behavior: Evidence from the Housing Market (November 24, 2017). Georgetown McDonough School of Business Research Paper No. 3076944. Available at SSRN: https://ssrn.com/abstract=3076944 or http://dx.doi.org/10.2139/ssrn.3076944

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

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

Changcheng Song (Contact Author)

National University of Singapore (NUS) ( email )

1 Arts Link, AS2 05-37
Singapore, 117568
Singapore
+6565166018 (Phone)

HOME PAGE: http://https://sites.google.com/site/songchch02/

Vincent Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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