Indicators of Collateral Misreporting

Recent studies use retrospective automated valuation models (AVMs) to investigate whether appraisals of collateral values associated with securitized residential mortgage loans were systematically inflated during the recent housing boom. In this paper, we provide evidence that high AVM pricing errors as well as selection bias in samples of completed loans, which are conditioned on relatively high appraisals, may generate the appearance of appraisal bias even when the original appraisals are unbiased estimates of the underlying value of the collateral. We present evidence that the estimated frequency of appraisal overstatement is quite sensitive to assumptions concerning loan denial rates as well as the magnitude of and the correlation between AVM and original appraisal pricing errors