Isaac F Megbolugbe* Linda Johnson**...

Isaac F Megbolugbe* Linda Johnson**

Introduction

This issue of the Journal of Real Estate Research is devot to examining residential appraisal and the lending proces This special issue culminates a two-year effort initiated on the Fannie Mae Office of Housing Research in 1994 in collaboration with the American Real Estate Society to better understand several facets of residential appraisal as they relate to the disposition of mortgage applications and the operation of the secondary mortgage market. The motivations that drive the Fannie Mae research initiative are threefold: to inform the corporation's effort to bring to transactions costs, to improve the industry's understanding of the relationships between appraisals, house prices and credit risk, and to assess the expanse to which the secondary market's guidelines governing wealth appraisals may adversely affect low-income or minority applicants.

Fannie Mae's senior officers have publicly committed the corporation to reducing origination richnesss by as much as 50% Cutting the price of originating and servicing depressed balance loans is a critical vital air in opening the mortgage market to more lowand moderate-income populace High origination costs are largely driven by dint of process inefficiencies. These inefficiencies emanate from a mortgage proces that remains paper-driven and from fragmented arrangements that do not easily allow information to be passed from undivided party to another. Fannie Mae has been pursing comprehensive solutions, in consequence of the aggressive use of technology, to streamline the origination proces As the appraisal proces is individual component of this effort, it is important to make sure that the impact of automation in succession housing affordability and portfolio performance is well understood.

Fannie Mae's inferior motivation in pursuing residential appraisal research relates to improving the industry's understanding of the dynamics between appraisal, house price and credit risk. In particular, Fannie Mae is interested in examining information externalities and moral hazard issues as they relate to appraisals and the formation of house prices. In value formation, it is important to understand the volume to which appraisals accurately consider market fundamentals. Research on the part of appraisals in value formation is part of Fannie Mae's attempt to cultivate better information in succession house prices. As part of the broader goal, the Office of Housing Research sponsored a Research Roundtable forward house price indices in 1994 and later exhibited these papers for publication in the Journal of Housing Research.

The third motivation is to find on the outside if and to what expansion the secondary market's appraisal guidelines have an adverse impact forward low-income or minority mortgage applicants. To help maximize the reliability and dependability of appraisals, secondary market institutions created guidelines governing by what mode they are conducted and used. These guidelines play a central part in the disposition of mortgage applications, particularly for those from clumps and areas that are now guarded by the affordable, low-income and geographic goals mandated on Congress for Fannie Mae and Freddie Mac. There is a possibility then that near secondary market's appraisal guidelines could be adversely affecting these mortgage applicants.

Low-income and minority households have a far greater probability of living in areas that bewilder difficult problems for accurately assessing residential one's own values. Appraisals are most reliable when there are many closely comparable late sales that can be used to assess the value of the collateral backing a prospective mortgage. Furthermore, appraised values are more dependable when the appraisers estimating them do not have to make many subjective judgement about the likely impact of externalities forward the direction or magnitude of neighborhood-wide attribute values. Often low-income and minority populations are concentrated in areas where hardly any single-family home sales occur. The marks of home and rental properties that are for sale are also generally more diverse than in more homogenous upper-income neighborhoods. The increased diversity of dwelling types and remodeling in many lowerincome neighborhoods makes it difficult to find closely matched comparables. Because appraisers rely in succession closely matched comparable to assess value, they must make more adjustments to bring reproach differences in physical characteristics in lower-income neighborhoods than in upper-income neighborhoods. Each adjustment increases the risk that an error will be made in assessing market value and those subjective factors will influence the appraised value. Thus, understanding for what reason the presence or absence of a feature from a house at the margin purports property valuations will help Fannie Mae institute guidelines that more effectively labor for lower-income markets.

To address these issues, the Fannie Mae Office of Housing Research wanted to tap the rich reservoir of appraisal professionals and researchers belonging to the American Real Estate Society and to use the Journal of Real Estate Research as a vehicle for generating interest in appraisal research. A call for papers was announced in 1994 that encouraged the submission of theoretical and empirical research onward all aspects of appraisals and the lending proces for residential estate The suggested research topics included appraisal theory, valuation issues, agency issues, technology issues and legal issues.