The accuracy of appraisals came into scrutiny during the housing crisis, and a set of policies and regulations was adopted to address the conflict-of-interest issues in the appraisal practices. In response to an investigation by the New York State Attorney General’s office, the Home Valuation Code of Conduct (HVCC) was agreed to by Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency. Using unique data sets that contain both approved and nonapproved mortgage applications, this study provides an empirical examination of the impact of the HVCC on appraisal and mortgage outcomes. The results suggest that the HVCC has led to a reduction in the probability of inflated valuations, although valuations remained inflated on average, and induced a significant increase in the incidence of low appraisals. The well-intentioned HVCC rule made it more difficult to obtain mortgages to purchase homes during the housing price crash, possibly exacerbating the fall in prices.

The fallout from the housing bubble raised questions about the accuracy of appraisals before the housing crisis, and, as a response, a set of policies and regulations was adopted to address the conflict-of-interest issues in the appraisal practices.1 With significantly tightened regulations and the decline in housing prices in many areas, there were concerns that more home valuations were underestimated and new mortgages became harder to obtain during the crisis,2 though the upward bias in appraisals that had prevailed during the subprime boom has been reduced somewhat in many markets. Despite the controversial role of appraisers before and during the most recent housing crisis, there is a lack of empirical research about the pattern of appraisal outcomes and the effects of the interventions adopted since the crisis on appraisals and the housing market overall. This study provides the first empirical examination of the impact of a major appraisal rule, the now-superseded Home Valuation Code of Conduct (HVCC), which was adopted in the middle of the housing crisis, on low appraisals and mortgage outcomes. Appraisal ratio is defined as an appraised value less the contract price as a percent of the contract price in this study, while low appraisal is defined as one in which appraised value falls below the contract price.