What is it about?
How banks’ choice of property valuation can bias mortgage risk and loan-to-value ratios.
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Why is it important?
Property values determine reported loan-to-value ratios and influence lending decisions, regulatory compliance and estimated losses. The study shows that switching between automated and manual valuations can allow banks to use the most favourable estimate, particularly near regulatory limits or when house prices fall. This may understate risk and make mortgage portfolios less comparable across banks.
Perspectives
Banks should calculate automated valuations for all suitable properties and report how often different valuation methods are used. Regulators and investors should assess not only reported property values, but also how those values were selected. More consistent valuation practices would improve transparency, risk measurement and comparability between mortgage portfolios.
Endre Jo Reite
Norwegian University of Science and Technology
Read the Original
This page is a summary of: Mortgage lending valuation bias under housing price changes and loan-to-value regulations, Finance Research Letters, December 2023, Elsevier,
DOI: 10.1016/j.frl.2023.104677.
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