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Semivariance of Property Value Estimates as a Determinant of Default Risk
Author(s) -
Noordewier Thomas G.,
Harrison David M.,
Ramagopal K.
Publication year - 2001
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1080-8620.00005
Subject(s) - semivariance , synthetic cdo , collateral , underwriting , economics , value (mathematics) , mortgage underwriting , actuarial science , portfolio , residential property , financial economics , valuation (finance) , default risk , business , econometrics , credit risk , mortgage insurance , finance , statistics , mathematics , credit valuation adjustment , economic geography , casualty insurance , insurance policy , credit reference , spatial variability
Standard practice in the residential mortgage underwriting industry is to estimate collateral values via independent appraisals conducted by third parties. This paper empirically examines the role of property value ( i.e. , appraisal) uncertainty as a determinant of default on residential mortgage loans. Based upon an analysis of 1,428 residential loans drawn from the portfolio of a national mortgage lender, we find evidence that semivariance in property value uncertainty is related to default risk. Specifically, subject properties that are valued above the sales price of recently sold “similar and proximate” properties show evidence of greater default risk. Interestingly, a variance (range) measure of property value uncertainty is not significantly related to default risk.