Competition and Appraisal Inflation

James Conklin (), N. Edward Coulson, Moussa Diop and Thao Le
Additional contact information
James Conklin: University of Georgia
N. Edward Coulson: University of California Irvine
Moussa Diop: University of Wisconsin-Madison
Thao Le: Georgia State University

The Journal of Real Estate Finance and Economics, 2020, vol. 61, issue 1, No 1, 38 pages

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: D1 G01 G10 G18 G2 R2 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11146-019-09697-w

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