Appraiser Independence, Bias and Mortgage Insurance Claims

Abstract

This paper examines the shift in how Federal Housing Administration collateral valuations were conducted in the mid-1990s. Moving from assignment of appraisers by Department of Housing and Urban Development field offices to selection by lenders did not increase the speed of valuations. However, the risk of appraisal and confirmation biases (i.e., valuations greater than or equal to the purchase price, respectively) was greater when the valuation was completed by an appraiser on the lender’s staff or selected by the lender. Yet under appraisals are rare, even among valuations completed by appraisers randomly assigned by HUD from a fee panel. “At price” but not over appraisals are associated with an increase in the risk of a mortgage insurance claim and higher rate of loss given claim. Valuations by HUD-assigned appraisers are associated with a lower likelihood of claim but higher loss given claim, but these effects do not appear to be explained by the results of the valuation relative to the purchase price. The mixed results indicate that strict appraiser independence regulations may not fully remedy errors in collateral valuation.