Missing the Mark: Mortgage Valuation Accuracy and Credit Modeling

In 2008, the US mortgage market collapsed under a lack of transparency, incorrect pricing, and underestimated risk. Price indexes, however, could help investment managers monitor assets that are heterogeneous or infrequently traded. Responding to needs for better valuation approaches, we created new localized house price indexes and evaluated their ability to predict transaction prices and mortgage performance. We show where and when valuation errors occur and how to avoid them. Our work has a broader application than mortgage valuation for analysts or investors valuing alternative assets—namely, using the most granular indexes yields positive but diminishing modeling gains when submarket trends exist. Disclosure: The authors report no conflicts of interest. Editor’s Note This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Jonatan Groba and Dan Scholz, CFA, were the reviewers for this article. Submitted 25 November 2017 Accepted 26 July 2018 by Stephen J. Brown