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Mortgage lending valuation bias under housing price changes and loan-to-value regulations

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  • Reite, Endre J.

Abstract

We examine valuation bias, regulatory loan-to-value limits, and real estate price fluctuations using unique data from two Norwegian banks. We investigate whether automated valuation methods significantly affect foreclosure discounts. Banks using multiple valuation methods tend to report loan-to-value bias by selecting the most optimistic value, underestimating and underreporting risk in declining property markets. This risk increases near regulatory loan-to-value limits, and the findings are robust across homogenous and heterogeneous properties. We recommend reporting automated valuation estimates for all applicable properties and disclosing the percentage of valuations done with different methods to improve transparency and risk comparability between banks.

Suggested Citation

  • Reite, Endre J., 2023. "Mortgage lending valuation bias under housing price changes and loan-to-value regulations," Finance Research Letters, Elsevier, vol. 58(PC).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pc:s1544612323010498
    DOI: 10.1016/j.frl.2023.104677
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