Collateral value uncertainty and mortgage credit provision

Abstract

Houses with higher value uncertainty receive less mortgage credit: mortgages backed by these houses are more likely to be rejected, have higher interest rates, and have lower loan-to-price ratios. The relationship between house value uncertainty and credit availability is driven partly by a classic channel in which uncertainty lowers debt recovery rates, and partly by a novel channel where more uncertain appraisals make regulatory constraints on loan size more likely to bind. We build a structural model to quantify the effects of each channel, and show how a shift toward computerized asset appraisals could influence credit access.