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Appraisal Quality and Residential Mortgage Default: Evidence from Alaska

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  • LaCour-Little, Michael
  • Malpezzi, Stephen

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. Copyright 2003 by Kluwer Academic Publishers

Suggested Citation

  • LaCour-Little, Michael & Malpezzi, Stephen, 2003. "Appraisal Quality and Residential Mortgage Default: Evidence from Alaska," The Journal of Real Estate Finance and Economics, Springer, vol. 27(2), pages 211-233, September.
    • Handle: RePEc:kap:jrefec:v:27:y:2003:i:2:p:211-33
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    Cited by:

    1. Diaz-Serrano, Luis, 2019. "Inflation of home appraisal values and the access to mortgage loans of credit constrained borrowers," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 412-422.
    2. Carlos Pestana Barros & Zhongfei Chen & Luis A. Gil-Alana, 2012. "Housing sales in urban Beijing," Applied Economics, Taylor & Francis Journals, vol. 44(34), pages 4495-4504, December.
    3. Barros, Carlos Pestana & Gil-Alana, Luis A. & Chen, Zhongfei, 2014. "The housing market in Beijing and delays in sales: A fractional polynomial survival model," Economic Modelling, Elsevier, vol. 42(C), pages 296-300.
    4. David Harrison & Michael Seiler, 2015. "The Paradox of Judicial Foreclosure: Collateral Value Uncertainty and Mortgage Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 50(3), pages 377-411, April.
    5. Yanling G. Mayer & Frank E. Nothaft, 2022. "Appraisal overvaluation: Evidence of price adjustment bias in sales Comparisons," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 862-881, September.
    6. Lei Ding & Leonard Nakamura, 2016. "The Impact of the Home Valuation Code of Conduct on Appraisal and Mortgage Outcomes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 44(3), pages 658-690, July.
    7. Sumit Agarwal & Itzhak Ben-David & Vincent Yao, 2015. "Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market," Management Science, INFORMS, vol. 61(9), pages 2220-2240, September.
    8. Alexander N. Bogin & Jessica Shui, 2018. "Appraisal Accuracy, Automated Valuation Models, And Credit Modeling in Rural Areas," FHFA Staff Working Papers 18-03, Federal Housing Finance Agency.
    9. Montalvo, José G. & Piolatto, Amedeo & Raya, Josep, 2020. "Transaction-tax evasion in the housing market," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    10. Ebrahim, M. Shahid, 2009. "Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 864-883, December.
    11. James Conklin & N. Edward Coulson & Moussa Diop & Thao Le, 2020. "Competition and Appraisal Inflation," The Journal of Real Estate Finance and Economics, Springer, vol. 61(1), pages 1-38, June.
    12. Alexander N. Bogin & Jessica Shui, 2020. "Appraisal Accuracy and Automated Valuation Models in Rural Areas," The Journal of Real Estate Finance and Economics, Springer, vol. 60(1), pages 40-52, February.
    13. Turnbull, Geoffrey K. & van der Vlist, Arno J., 2022. "The price of ignorance: Foreclosures, uninformed buyers and house prices," Journal of Housing Economics, Elsevier, vol. 57(C).
    14. Ozlem Akin & José Montalvo & Jaume García Villar & José-Luis Peydró & Josep Raya, 2014. "The real estate and credit bubble: evidence from Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 5(2), pages 223-243, August.
    15. Eriksen, Michael D. & Fout, Hamilton B. & Palim, Mark & Rosenblatt, Eric, 2019. "The influence of contract prices and relationships on appraisal bias," Journal of Urban Economics, Elsevier, vol. 111(C), pages 132-143.
    16. Shi, Lan & Zhang, Yan, 2015. "Appraisal inflation: Evidence from the 2009 GSE HVCC intervention," Journal of Housing Economics, Elsevier, vol. 27(C), pages 71-90.
    17. Natividad Guadalajara & Miguel Ángel López & Adina Iftimi & Antonio Usai, 2021. "Influence of the Cadastral Value of the Urban Land and Neighborhood Characteristics on the Mean House Mortgage Appraisal," Land, MDPI, vol. 10(3), pages 1-17, March.
    18. Neil Bhutta, 2011. "The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods," Journal of Law and Economics, University of Chicago Press, vol. 54(4), pages 953-983.
    19. Díaz Serrano, Lluís, 2015. "Banks, Lies and Bricks: The Determinants of Home Value Inflation in Spain during the Housing Boom," Working Papers 2072/247804, Universitat Rovira i Virgili, Department of Economics.
    20. David Downs & Z. Güner, 2012. "Information Producers and Valuation: Evidence from Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 167-183, January.
    21. Andersson, Fredrik & Mayock, Tom, 2014. "Loss severities on residential real estate debt during the Great Recession," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 266-284.
    22. Leonard I. Nakamura, 2010. "How much is that home really worth? Appraisal bias and house-price uncertainty," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 11-22.
    23. Neil Bhutta, 2008. "Giving credit where credit is due? the Community Reinvestment Act and mortgage lending in lower-income neighborhoods," Finance and Economics Discussion Series 2008-61, Board of Governors of the Federal Reserve System (U.S.).

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