Inflation of home appraisal values and the access to mortgage loans of credit constrained borrowers

Upwards biased appraised home values allow the drawing of larger mortgages, which can be used to give financially constrained households access to mortgage credit. In this paper, I analyze this phenomenon for the first time outside of the US. I use a unique Spanish dataset of matched mortgage-dwelling-borrower characteristics covering the period 2004-2010. The data allow me to construct a measure of home appraisal bias. The results indicate that appraised home values were inflated on average by around 30% with respect to the contract purchase prices. I also observe that credit-constrained households were more likely to be involved in mortgages with inflated house values and that upwards bias in appraisals was more likely to occur in mortgage markets in which there was a higher degree of competition among lenders. This situation led lenders to lower credit standards dramatically.