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Appraisal quality and loan characteristics: evidence from Newcomb–Benford Law

Author

Listed:
  • Hong Lee

    (Wright State University, Raj Soin College of Business)

  • Joseph R. Mason

    (E. J. Ourso College of Business, Louisiana State University)

Abstract

Leading digits in mortgage collateral value estimates are expected to approximate a logarithmic distribution, consistent with the Newcomb–Benford Law (NBL), when such values are modeled as geometric sequences or random samples drawn from heterogeneous price distributions. Using representative US datasets, we document substantial discrepancies between the observed and expected distributions of leading digits in appraisal values. The magnitude of this deviation increases with loan-to-value ratios and interest rates, while it declines with higher credit scores and safer credit classifications. We also find a systematic underrepresentation of high digits (e.g., 8 and 9) and overrepresentation of low digits (e.g., 0 and 1) in the second leading positions, and that this pattern becomes more pronounced with greater ex-ante loan risk. These findings suggest that nonconformance with NBL may stem from upward bias in appraised values, particularly in riskier lending environments.

Suggested Citation

  • Hong Lee & Joseph R. Mason, 2025. "Appraisal quality and loan characteristics: evidence from Newcomb–Benford Law," Empirical Economics, Springer, vol. 69(6), pages 3721-3758, December.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:6:d:10.1007_s00181-025-02814-0
    DOI: 10.1007/s00181-025-02814-0
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    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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