Appraising Home Purchase Appraisals

56 Pages Posted: 2 Jan 2019 Last revised: 29 Apr 2020

See all articles by Paul Calem

Paul Calem

Board of Governors of the Federal Reserve System

Lauren Lambie-Hanson

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: 2018-12-27

Abstract

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 appraisers’ 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

Calem, Paul and Lambie-Hanson, Lauren and Nakamura, Leonard I., Appraising Home Purchase Appraisals (2018-12-27). FRB of Philadelphia Working Paper No. 18-28. Available at SSRN: https://ssrn.com/abstract=3307266 or http://dx.doi.org/10.21799/frbp.wp.2018.28

Paul Calem (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Lauren Lambie-Hanson

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

HOME PAGE: http://sites.google.com/laurenlambiehanson

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3804 (Phone)
215-574-4364 (Fax)

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