Historically, purchase mortgages have performed better than refinance mortgages, or “refis,” defaulting less often. But changes made in response to widespread appraisal bias during the crisis have improved the industry’s risk assessment and management abilities overall and, accordingly, have decreased the expected default rate on all mortgages.
We looked at the data and concluded that these improvements have reduced the difference in how purchase and refi mortgages perform. And while the models used in FHA, Fannie and Freddie underwriting systems are not public, our results suggest an update may be in order.
Reducing appraisal bias
The pervasive belief that appraisal bias, especially towards no-transaction refinances, was a significant contributor to the great financial crisis lead to a significant re-evaluation of the appraisal process after the crisis. Appraisals undergo much greater scrutiny today, and the GSEs commonly check these numbers against values generated from automated valuation models (AVMs). AVMs use mathematical modeling, drawing on a huge database of recent transactions, complete with property characteristics, to generate an estimated sales prices.
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