Appraisal Accuracy, Automated Valuation Models, And Credit Modeling in Rural Areas
Alexander Bogin () and
No 18-03, FHFA Staff Working Papers from Federal Housing Finance Agency
Accurate and unbiased property value estimates are essential to credit risk management. Along with loan amount, they determine a mortgage’s loan-to-value ratio, which captures the degree of homeowner equity and is a key determinant of borrower credit risk. For home purchases, lenders generally require an independent appraisal, which, in addition to a home’s sales price, is used to calculate a value for the underlying collateral. A number of empirical studies have shown that property appraisals tend to be biased upwards, and over 90 percent of the time, either confirm or exceed the associated contract price. Our data suggest that appraisal bias is particularly pervasive in rural areas where over 25 percent of rural properties are appraised at more than five percent above contract price. Given this significant upward bias, we examine a host of alternate valuation techniques to more accurately estimate rural property values. We then include these alternate value estimates when modeling delinquencies and examine their explanatory power.
Keywords: automated valuation models; appraisal; property value; credit risk; rural (search for similar items in EconPapers)
JEL-codes: G21 L85 R3 (search for similar items in EconPapers)
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