Appraising Home Purchase Appraisals
56 Pages Posted: 2 Jan 2019 Last revised: 29 Apr 2020
Date Written: 2018-12-27
Home appraisals are produced for millions of residential mortgage transactions each year, but appraised values are rarely below the purchase contract price: Some 30% of appraisals in our sample are exactly at the home price (with less than 10% of them below it). We lay out a basic theoretical framework to explain how appraisersâ€™ incentives within the institutional framework that governs mortgage lending lead to information loss in appraisals (that is, appraisals set equal to the contract price). Consistent with the theory, we observe a higher frequency of appraisal equal to contract price and a higher incidence of mortgage default at loan-to-value boundaries (notches) above which mortgage insurance rates increase. Appraisals appear to be less informative for default risk measurement compared with automated valuation models.
Keywords: information, mortgage, regulation, appraisal, mortgage default, foreclosure
JEL Classification: D81, G14, G21, G28, L85
Suggested Citation: Suggested Citation