Working Paper

Appraising Home Purchase Appraisals

Abstract: Home appraisals are produced for millions of residential mortgage transactions each year, but appraised values are rarely below the purchase contract price. We argue that institutional features of home mortgage lending cause much of the information in appraisals to be lost: some 30 percent of recent appraisals are exactly at the home price (with less than 10 percent below it). We lay out a novel, basic theoretical framework to explain how lenders? and appraisers? incentives lead to information loss in appraisals (that is, appraisals set equal to the contract price). Such information loss is more common at loan-to-value boundaries where mortgage insurance rates increase and appears to be associated with a higher incidence of mortgage default, after controlling for pertinent borrower and loan-level characteristics. Appraisals do, in some cases, improve default risk measurement, but they are less informative than automated valuation models. An important benefit of appraisals reported below the contract price is that they help borrowers renegotiate prices with sellers.

Keywords: Information; Mortgage; Regulation; Appraisal; Mortgage Default; Foreclosure;

JEL Classification: D81; G14; G21; G28; L85;

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Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2017-07-31

Number: 17-23

Pages: 57 pages