The use of a pending mortgage reference point in valuation judgment
| Date | 01 June 2004 |
| DOI | https://doi.org/10.1108/14635780410538177 |
| Published date | 01 June 2004 |
| Pages | 259-268 |
| Author | J. Andrew Hansz |
| Subject Matter | Property management & built environment |
The use of a pending mortgage
reference point in valuation
judgment
J. Andrew Hansz
Department of Finance and Real Estate, University of Texas,
Arlington, Texas, USA
Keywords Real estate, Assets valuation, Borrowing
Abstract American real estate appraisers given identical valuation problems produced
statistically different value estimates. The measured variable between experimental groups was an
agency-client treatment operationalized as a pending mortgage scenario. This finding is consistent
with the view of anchoring as a routinized response to agent-client concerns. Experienced
appraisers may develop heuristic behaviors which subconsciously sensitizes them to agency-client
considerations. Although further research is warranted, this study provides initial experimental
evidence of a causal link between agency-client concerns and valuation bias.
Introduction
Through years of experience and, inevitably, confrontations with clients, American
appraisers learn about the consequences of a “low” valuation estimate. The appraiser is
often contacted by the mortgage originator and/or the mortgagor to defend the
valuation and asked to reconsider the submitted estimate to complete a pending loan
application. Implications of these agency-client concerns go beyond the valuation
assignment at hand. Gwin and Maxam (2002) find, in a game of moral hazard with
hidden information, that a moral hazard can arise if the appraiser is rewarded with
future business. A “low” valuation estimate may result in the appraiser receiving
decreasing amounts of work from a client or removal from an originator’s approved list
of appraisers.
Appraisers face high costs for valuing a property below a pending sale price and the
institutional setting of the industry puts a heavy burden of proof on “low” appraised
values. Smolen and Hambleton (1997) report on the pervasiveness of client pressure.
Roberts and Roberts (1991) pose the theory that client influences may represent the
most common cause of appraisal judgment bias.
Appraisers are sensitized to agency-client concerns and may develop subconsciou s
production rules (heuristics) which are imbedded in the problem solving schema that
places heavy weight on pending mortgage amounts. This subconscious process could
lead to systematic error generally referred to as appraisal or valuation bias. This
current study employs an experimental methodology to investigate a direct causal link
between an agency-client concern and valuation bias.
Literature review and research hypothesis
In their ground-breaking work, Newell and Simon (1972) and Simon (1978) develop a
theory of human information processing. Unfortunately, the human information
processing system, or mind, is less than perfect with vital cognitive shortcomings.
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
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Pending
mortgage
reference point
259
Received April 2003
Accepted August 2003
Journal of Property Investment &
Finance
Vol. 22 No. 3, 2004
pp. 259-268
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635780410538177
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