Journal of Real Estate Finance and Economics, 27:2, 211±233, 2003
# 2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Appraisal Quality and Residential Mortgage Default:
Evidence from Alaska
Wells Fargo Home Mortgage & Washington University in St. Louis, 7911 Forsyth Boulevard, Suite 600,
Clayton, MO 63105, U.S.A.
The Center for Urban Land Economics Research, The University of Wisconsin, 975 University Avenue,
Madison, WI 53706-1323, U.S.A.
We empirically examine the effect of appraisal quality on subsequent mortgage loan performance using data from
the high volatility housing market of Alaska in the 1980s. We develop measures of appraisal quality by computing
the residual between a hedonic estimate of house value using available information from other appraisals
compared to actual ex ante appraised value. We then estimate proportional hazard models of mortgage default and
®nd that several measures of appraisal quality, particularly appraised value in excess of hedonic estimates, are
signi®cantly related to default risk. Using valuations subsequent to loan default, we are 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. We also
show that defaults are related to ex ante measures of housing market conditions, with additional implications for
underwriting policies and the current industry trend away from traditional appraisal and toward automated
Key Words: appraisal, mortgage, default, house price indices
While a large literature exists on how to make high quality, professional appraisals,
surprisingly few ex post evaluations of actual real estate appraisals appear in the scholarly
literature. This is particularly surprising given the stakes involved in appraisal.
One particular area in which appraisal quality has been discussed anecdotally has been
the relationship between appraisal quality and mortgage default. Accounts of the thrift
crisis appearing in the popular press often discuss the role low quality (and sometimes
fraudulent) appraisals played in the high level of defaults and associated losses in the
1980s (e.g., Adams, 1990; U.S. House of Representatives, 1985). Concern was so great
that the FIRREA legislation contained provisions mandating licensure of appraisers
working for insured depository institutions. Today, the industry trend is away from
traditional appraisal and toward automated valuation systems that can be incorporated into