Appraisal Quality and Residential Mortgage Default: Evidence from Alaska

The effect of appraisal quality on subsequent mortgage loan performance is empirically examined using data from the high volatility housing market of Alaska in the 1980s. Measures of appraisal quality are developed by computing the residual between a hedonic estimate of house value using available information from other appraisals compared to actual ex ante appraised value. The paper then estimates proportional hazard models of mortgage default and finds that several measures of appraisal quality, particularly appraised value in excess of hedonic estimates, are significantly related to default risk. Using valuations subsequent to loan default, the paper is also able to evaluate how well house price indices perform in terms of estimating current loan-to-value and offer some additional evidence on the controversy over the role of net equity versus trigger events as determinants of mortgage default.