| This study develops a theoretical model explaining collateral appraisal patterns in the residential mortgage market on the basis of mortgagor default behavior as perceived by the lender. Although prior studies have dealt with the issue of appraisal formation, a cohesive theory of institutional collateral appraisal practice depicting mortgagee motivation is lacking in the literature. Without modeling of the incentive for collateral underappraisal or overappraisal, it becomes a futile attempt to distinguish invidious discrimination from the rationale economic discrimination. Therefore, this study can be considered as a beginning of theoretical explanation of institutional collateral perspective. The model developed has established that collateral valuation is a component of lender's risk compensated expected return where expected return is the primary decision variable for a profit maximizing rational lender. Various implications of the phenomenon are also explored although the theoretical development has been the primary focus of the research endeavor.; The second part of the study deals with the empirical evidence for the existence of incentives for collateral under or over appraisal in the single family residential mortgage market. This empirical component of the study examines the relationship between the actual default experience and the perceived minority default risk as reflected in minority, under-served area, and first-time home buyer lending levels. Previous empirical studies have alluded to the discriminatory means of loan-to-value ratio without specifying the rationale for the lender behavior. |
