Competition and Appraisal Inflation

53 Pages Posted: 18 Jan 2019

See all articles by James Conklin

James Conklin

University of Georgia

N. Edward Coulson

Independent

Moussa Diop

University of Southern California

Thao Le

Georgia State University - Department of Real Estate

Date Written: December 21, 2018

Abstract

In mortgage debt contracts, real property serves as collateral and the terms of mortgage financing are largely conditional on the certification of collateral value by appraisers. However, overstatement of collateral value is common in the appraisal industry, causing troubles in the mortgage market as observed in the recent crisis. In this paper, we examine whether competition in the appraisal industry affects appraisal bias. We model appraiser behavior given a loan officer's preference for favorable appraisals (i.e. appraisal values at least as high as the transaction prices). As appraisers cater to loan officers to increase their probability of winning future business, our model predicts more inflated appraisals in more competitive markets. We confirm this prediction using a sample of purchase mortgages originated between 2003-2006 by a large subprime mortgage lender. Our results show that a one standard deviation increase in appraiser competition, measured at the MSA/year level, is associated with a 1.6-3.7 percentage point increase in the share of at-price appraisals. Furthermore, the effect is stronger in areas experiencing high house price growth.

Keywords: Competition, Appraisal Bias, Mortgages

JEL Classification: G2, G01, G18, D1, R2

Suggested Citation

Conklin, James and Coulson, N. Edward and Diop, Moussa and Le, Thao, Competition and Appraisal Inflation (December 21, 2018). Available at SSRN: https://ssrn.com/abstract=3312360 or http://dx.doi.org/10.2139/ssrn.3312360

James Conklin (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

N. Edward Coulson

Independent

Moussa Diop

University of Southern California ( email )

Sol Price School of Public Policy
RGL 315
Los Angeles, CA 90089
United States
(213)821-0467 (Phone)

Thao Le

Georgia State University - Department of Real Estate ( email )

P.O. Box 4020
Atlanta, GA 30303-4020
United States

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