Journal of Real Estate Finance and Economics, Vol. 16:3, 301±315 (1998)
# 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Are Minorities or Minority Neighborhoods More
Likely to Get Low Appraisals?
Citicorp Mortgage, Inc., St. Louis, MO 63141, e-mail: firstname.lastname@example.org
RICHARD K. GREEN
Department of Real Estate and Urban Land Economics, University of Wisconsin±Madison, 975 University
Avenue, Madison, WI 53706, e-mail: email@example.com
We empirically examine the role of appraisal in the residential mortgage lending processÐin particular, the
incidence, consequences, and determinants of appraisal below contract purchase price. Using the Boston Federal
Reserve Study data set, we ®nd that, as expected, low appraised value signi®cantly increases the probability of
mortgage loan application rejection. We ®nd no evidence that low appraised value is related to census tract racial
composition, an important ®nding given the history of the appraisal industry; however, low appraised value is
related to proxies for neighborhood quality. Moreover, properties securing adjustable rate mortgages,
condominiums, and properties purchased by African American buyers show an increased probability of low
appraisal, though the race effect result is highly sensitive to model speci®cation.
Key Words: mortgage, appraisal, discrimination
Appraisal is an essential part of residential mortgage underwriting since sale of the
collateral real estate represents the lender's ultimate remedy in the event of borrower
default. Yet appraisal is an inexact procedure producing only an opinion of value. To the
extent that opinion is biased, housing market ef®ciency may be impaired, since lenders
may misjudge, and misprice, credit risk. In this article we consider the problem of low
appraised value, de®ned as appraisal
below contract purchase price.
Low appraised value may have several consequences in the mortgage lending process.
At the extreme, if the appraisal is less than the requested loan, collateral is insuf®cient and
the loan application will be rejected, except in exceptional circumstances.
dramatically, low appraised value may simply shift the loan applicant into a higher
loan-to-value (LTV) category with associated pricing increases (LTV is de®ned as loan
amount/(min[price, appraised value]) For example, if the applicant has a 20% down
payment and the appraisal is 5% below the contract price, the LTV will increase to 84%,
and the borrower must either (1) increase down payment to maintain a 80% LTV or (2)
purchase private mortgage insurance to reduce the lender's risk due to the higher LTV.