Attribute (Mis)Reporting and Appraisal Bias

66 Pages Posted: 31 Mar 2020 Last revised: 31 Mar 2022

See all articles by Michael D. Eriksen

Michael D. Eriksen

University of Cincinnati - Department of Finance - Real Estate

Chun Kuang

University of International Business and Economics (UIBE) - School of Banking and Finance

Wenyu Zhu

Renmin University of China - School of Finance

Date Written: March 12, 2022

Abstract

We assemble a property-level panel of appraiser reported attributes associated with 4.6 million loan applications from 2013 to 2017 to test whether attributes were consistently reported. Appraisers have an incentive to misreport property attributes to justify higher appraised values to ensure associated mortgage loans are approved. We find evidence of discrepancies in reported attributes consistent with an intention to inflate valuations, even when restricting to those recently reported by the same appraiser. Purposeful misreporting is identified in cases where appraisers who report attributes of the same comparable transaction as inferior when the associated subject property's contract price exceeds alternative value estimates. We estimate that highly leveraged borrowers whose appraisals had inconsistently reported comparable transaction attributes were 13.3-14.3% more likely to become seriously delinquent in their loan payments.

Keywords: appraisal, real estate market, mortgage, collateral valuation

JEL Classification: R31, G21, G28, K1

Suggested Citation

Eriksen, Michael D. and Kuang, Chun and Zhu, Wenyu, Attribute (Mis)Reporting and Appraisal Bias (March 12, 2022). Available at SSRN: https://ssrn.com/abstract=3529608 or http://dx.doi.org/10.2139/ssrn.3529608

Michael D. Eriksen (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Chun Kuang

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Wenyu Zhu

Renmin University of China - School of Finance ( email )

59 Zhongguancun Street
Beijing, 100872
China

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