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Appraisal Quality and Residential Mortgage Default: Evidence from Alaska

Posted: 5 Jun 2003  

Michael LaCour-Little

California State University at Fullerton; Federal National Mortgage Association (Fannie Mae)

Stephen Malpezzi

University of Wisconsin at Madison

Abstract

We empirically examine the effect of appraisal quality on subsequent mortgage loan performance using data from the high volatility housing market of Alaska in the 1980s. We develop measures of appraisal quality by computing the residual between a hedonic estimate of house value using available information from other appraisals compared to actual ex ante appraised value. We then estimate proportional hazard models of mortgage default and find that several measures of appraisal quality, particularly appraised value in excess of hedonic estimates, are significantly related to default risk. Using valuations subsequent to loan default, we are also able to evaluate how well house price indices perform in terms of estimating current loan-to-value and offer some additional evidence on the controversy over the role of net equity versus trigger events as determinants of mortgage default. We also show that defaults are related to ex ante measures of housing market conditions, with additional implications for underwriting policies and the current industry trend away from traditional appraisal and toward automated valuation.

Keywords: appraisal, mortgage, default, house price indices

Suggested Citation

LaCour-Little, Michael and Malpezzi, Stephen, Appraisal Quality and Residential Mortgage Default: Evidence from Alaska. Journal of Real Estate Finance & Economics, Vol. 27, No. 2. Available at SSRN: https://ssrn.com/abstract=367640

Michael LaCour-Little

California State University at Fullerton ( email )

5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States
202-752-3318 (Phone)

Stephen Malpezzi (Contact Author)

University of Wisconsin at Madison ( email )

5257 Grainger Hall
Madison, WI 53706
United States
608-262-6007 (Phone)
608-263-0477 (Fax)

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