SMU SOE Seminar (Sep 21, 2018): Competition and Appraisal Inflation

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TOPIC:

COMPETITION AND APPRAISAL INFLATION

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 Codes: G2, G1, G10, G18, D1, R2 Click here to view the paper. Click here to view the CV.
		PRESENTER Edward Coulson UC Irvine
		RESEARCH FIELDS Real Estate Economics Housing Economics Urban and Regional Economics Econometrics Public Economics
		DATE: 21 September 2018 (Friday)
		TIME: 4pm - 5.30pm
		VENUE: Meeting Room 5.1, Level 5 School of Economics Singapore Management University 90 Stamford Road Singapore 178903

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