Appraisal, Agency and Atypicality: Evidence from Manufactured Homes

Abstract

The appraisal of the "market value" of homes serving as the collateral for mortgages is a fundamental part of the underwriting process. If a loan should default, however, it is not the retail market value that the lender obtains, but rather the "recovery value." In this research, we show how recovery values differ from market values at origination and explore the reasons for the differences. Using a large sample of chattel mortgages on manufactured homes, we explore the relationship among the selling prices, the book values, and the fitted values from simple hedonic models with spatial autocorrelation. We then address the differences between selling prices at origination and recoveries from repossessed homes. We find that the spread between them varies systematically with home characteristics and especially with "atypicality," that is, with measures of how unusual a home is. Selling prices both at origination and recovery affect borrower defaults.For decades, property appraisal has been a mainstay of mortgage underwriting and is an essential element of the verification process for lenders. The appraiser provides a professional estimate of the value of the property that can be used to verify that the selling price is representative of current market conditions. The lender uses the appraisal to assess whether the loan will perform, that is, repay in full, and whether the loan will be profitable for the lender. But is the simple point estimate sufficient for assessing the risks associated with the collateral? Can lenders improve loan decisions with information on the expected second moment or with estimates of the likely recovery values from a default?In this research, we explore these issues with a large data set of chattel mortgages on manufactured homes. Manufactured homes, although little researched, are an increasingly important segment of the housing market. The Manufactured Housing Institute reports that 8% of the U.S. population lives in manufactured homes. In 2001, manufactured homes made up about 15% of residential starts.

House Price Changes and Idiosyncratic Risk: The Impact of Property Characteristics

“…A number of subsequent studies have considered the effect of atypicality on house price or the length of time to sale, but no research has considered the impact of atypicality on the rate of house price appreciation, which is the focus of our study. Capozza, Israelsen and Thomson (2005) use a sample of manufactured homes to study the factors that explain the difference between the original transaction price of a unit and the postdefault recovery price. They find that increased atypicality raises the original price as predicted by search theory, but it reduces the recovery price.…”

House Price Appreciation in Old Age: Analysis and Issues for the Use of Reverse Mortgages as a Retirement Funding Strategy in Australia

“…When a house becomes atypical relative to other houses in the market, this can lower demand and increase search costs associated with finding a buyer. Appraisers may then have difficulty finding comparable houses in the neighbourhood (Capozza et al 2005). As a result, the appraised value of the house maybe discounted.…”

“…Rodda and Patrabansh (2007) postulated that elderly home owners are less likely to have updated the style of their house resulting in the house acquiring unusual features as it ages. Capozza et al (2005) noted as a house becomes atypical relative to other houses in the market, this can lower demand and increase search costs associated with finding a buyer. Appraisers may then have difficulty finding comparable houses in the neighbourhood.…”

Optimal Stopping and Losses on Subprime Mortgages

“…Older homes tend to be more atypical and require more maintenance. Atypical homes are also less liquid and sell with wider bid-ask spreads (see Capozza et al, (2005)). …”