Attribute (Mis)Reporting and Appraisal Bias

38 Pages Posted: 31 Mar 2020

See all articles by Michael D. Eriksen

Michael D. Eriksen

University of Cincinnati - Department of Finance - Real Estate

Chun Kuang

University of International Business and Economics (UIBE) - School of Banking and Finance

Wenyu Zhu

Renmin University of China - School of Finance

Date Written: March 12, 2020

Abstract

Property appraisers can purposefully inflate valuation estimates by misreporting the underlying attributes of subjects as well as comparable transactions selected to base their estimate. A property-level panel of appraiser reported attributes associated with 3.5 million loan applications from 2013 to 2017 is created to test whether attributes of the same property are consistently reported. We find that 98% of properties had at least one-of-seven attributes inconsistently reported, and that reporting errors were often consistent with systematic misreporting in order to inflate the valuation of subject properties. Our strongest evidence of purposeful misreporting was when an appraiser inconsistently reported attributes of the same comparable transaction selected to value different properties. We estimate highly leveraged borrowers whose appraisals had inconsistently reported attributes were 5-to-23% more likely to become seriously delinquent in their loan payments. This evidence indicates that appraisal bias is common and has significant consequences for lenders.

Keywords: appraisal, real estate market, mortgage, collateral valuation

JEL Classification: R31, G21, G28, K1

Suggested Citation

Eriksen, Michael D. and Kuang, Chun and Zhu, Wenyu, Attribute (Mis)Reporting and Appraisal Bias (March 12, 2020). Available at SSRN: https://ssrn.com/abstract=3529608 or http://dx.doi.org/10.2139/ssrn.3529608

Michael D. Eriksen (Contact Author)

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

College of Business Administration
Cincinnati, OH 45221
United States

Chun Kuang

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Wenyu Zhu

Renmin University of China - School of Finance ( email )

59 Zhongguancun Street
Beijing, 100872
China

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