Relational Contracts, Reputational Concerns, and Appraiser Behavior: Evidence from the Housing Market
47 Pages Posted: 29 Nov 2017
Date Written: November 24, 2017
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: Suggested Citation