Can regulation de-bias appraisers?

This paper examines the effect of a regulatory action (the Home Valuation Code of Conduct) that was designed to reduce the incidence of inflated collateral valuations. We identify the impact of the regulation using a difference-in-difference identification strategy. Our baseline results confirm that the regulation reduced inflated valuations in refinance transactions by 16% in the large lender sample, compared to small lenders and a placebo sample. The effect is most significant in low-liquidity and low-distress markets, but not in other markets. We find that the regulation had a significant impact on loan to value ratio and interest rate, and it also led to a significant increase in defaults but a decrease in prepayments.