Can Regulation De-bias Appraisers?

This paper examines the effect of a regulatory action (the Home Valuation Code of Conduct) that was designed to reduce the incidence of inflated collateral valuations. We identify the impact of the regulation using a difference-in-difference identification strategy. Our baseline results confirm that the regulation reduced inflated valuations in refinance transactions by 16% in the large lender sample, compared to small lenders and a placebo sample. The effect is most significant in low-liquidity and low-distress markets, but not in other markets. We find that the regulation had a significant impact on loan to value ratio and interest rate, and it also led to a significant increase in defaults but a decrease in prepayments.

Agarwal, Sumit and Ambrose, Brent W. and Yao, Vincent, Can Regulation De-bias Appraisers? (April 21, 2019). Journal of Financial Intermediation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2487393 or http://dx.doi.org/10.2139/ssrn.2487393