The Influence of Contract Prices and Relationships on Collateral Valuation

44 Pages Posted: 31 Jul 2018

See all articles by Michael D. Eriksen

Michael D. Eriksen

University of Cincinnati - Department of Finance - Real Estate

Hamilton B. Fout

Federal National Mortgage Association (Fannie Mae); Kansas State University

Mark Palim

Federal National Mortgage Association (Fannie Mae)

Eric Rosenblatt

Federal National Mortgage Association (Fannie Mae) - Research

Date Written: July 19, 2018

Abstract

Prior evidence has shown appraised values of residential properties are biased, but the mechanism and motivation of appraisers to bias their estimates are unclear. We construct a database of 25.3 million comparable transactions selected and used by appraisers to estimate 6.5 million property values associated with a home purchase from 2013 until 2017. The primary source of introduced bias we identify is in the weights appraisers assign to individual comparable transactions after already adjusting for observable attributes. We find appraisers use unequal weighting to increase appraised values to match contract price for over 69% of properties if an otherwise equal weighting would have resulted in an appraised value under that amount. This unequal weighting resulted in an additional 23% of properties having an appraised value at least equal to contract price. Using appraiser-specific fixed effects, we show appraisers were most likely to apply differential weights to confirm contract price for the properties associated with financial institutions, loan officers, and real estate brokers they worked with most frequently. We discuss potential reforms to offset such biases in the conclusion.

Keywords: mortgage loans, collateral, soft relationships, big data

JEL Classification: G21, G28, K11, L85, R31

Suggested Citation

Eriksen, Michael D. and Fout, Hamilton B. and Palim, Mark and Rosenblatt, Eric, The Influence of Contract Prices and Relationships on Collateral Valuation (July 19, 2018). University of Cincinnati Lindner College of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3216648 or http://dx.doi.org/10.2139/ssrn.3216648

Michael D. Eriksen (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Hamilton B. Fout

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States

Kansas State University ( email )

Manhattan, KS 66502-4001
United States

Mark Palim

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States

Eric Rosenblatt

Federal National Mortgage Association (Fannie Mae) - Research ( email )

16517 Keats Terrace
Derwood, MD 20855
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
44
Abstract Views
410
PlumX Metrics