Property Appraisals and Moral Hazard

Posted: 23 Apr 1998

See all articles by David K. Horne

David K. Horne

Federal Deposit Insurance Corporation

Eric Rosenblatt

Federal National Mortgage Association (Fannie Mae) - Research

Date Written: June 1996


Mortgage underwriters have historically required that the value of residential real estate be verified by property appraisers. Appraisals reduce lending risk by providing lenders with a measure of collateral value. In recent years, loan originators have taken smaller risk positions with respect to mortgages. With incomes tied to the origination of loans but not their performance, underwriters appear to have incentives to obtain appraisals supporting the approval decision rather than providing unbiased estimates of property value. The present paper examines over 4,000 conventional home purchase mortgage loan applications from 38 states at a large thrift institution in 1989 and 1990. Our data show a strong bias in favor of "high" appraisals. The rate of low appraisals falls almost to zero at critical LTV thresholds, where a small change in collateral value might have a large impact on the loan transaction costs. Low appraisals are more frequently observed for attached, multi- unit and investment properties than for single-family detached properties. However, the likelihood of a low appraisal is unrelated to the size of the loan and to the race and ethnicity of the borrower.

JEL Classification: R31

Suggested Citation

Horne, David K. and Rosenblatt, Eric, Property Appraisals and Moral Hazard (June 1996). Available at SSRN:

David K. Horne (Contact Author)

Federal Deposit Insurance Corporation ( email )

550 Seventeenth Street, NW
Washington, DC 20057
United States
202-898-3981 (Phone)
202-898-3763 (Fax)

Eric Rosenblatt

Federal National Mortgage Association (Fannie Mae) - Research ( email )

16517 Keats Terrace
Derwood, MD 20855
United States

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