Collateral Misreporting in the RMBS Market ∗

Based on differences between residential mortgage appraisals and automated valuation model (AVM) valuations from a leading valuation firm, at least 15% of non-agency securitized loans originated between 2001 and 2007 have upwardly biased appraisals, which cause average collateral value to be overstated by almost 5%. Simulations and internal data from a large lender that include funded loans and unfunded loan applications indicate that this bias comes from intentional appraisal inflation as opposed to selection bias. Appraisal bias is correlated with subsequent delinquency, and if loan-to-value ratios were based on AVM valuations rather than appraisals, 14% of loans would have origination loan-to-value ratios above 100%. Finally, appraisal bias varies across loan officers, mortgage brokers, and appraisers; and past appraisal bias predicts subsequent appraisal bias, which suggests that appraisal bias is related to intentional decisions made by these people.