Bridge over ocean
6 December 2018 Financial Analysts Journal Volume 75, Issue 1

Missing the Mark: Mortgage Valuation Accuracy and Credit Modeling

  1. Alexander N. Bogin
  2. William M. Doerner
  3. William D. Larson

In 2008, the US mortgage market collapsed under a lack of transparency, incorrect pricing, and underestimated risk. Price indexes, however, could help investment managers monitor assets that are heterogeneous or infrequently traded. Responding to needs for better valuation approaches, we created new localized house price indexes and evaluated their ability to predict transaction prices and mortgage performance. We show where and when valuation errors occur and how to avoid them. Our work has a broader application than mortgage valuation for analysts or investors valuing alternative assets—namely, using the most granular indexes yields positive but diminishing modeling gains when submarket trends exist.

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