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Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market

Author

Listed:
  • Sumit Agarwal

    (National University of Singapore, Singapore 119245)

  • Itzhak Ben-David

    (Fisher College of Business, Ohio State University, Columbus, Ohio 43210; and National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Vincent Yao

    (Fannie Mae, Washington, DC 20016)

Abstract

Financially constrained borrowers have the incentive to influence the appraisal process in order to increase borrowing or reduce the interest rate. We document that the average valuation bias for residential refinance transactions is above 5%. The bias is larger for highly leveraged transactions, around critical leverage thresholds, and for transactions mediated through a broker. Mortgages with inflated valuations default more often. Lenders account for 60%–90% of the bias through pricing. This paper was accepted by Wei Jiang, finance .

Suggested Citation

  • Sumit Agarwal & Itzhak Ben-David & Vincent Yao, 2015. "Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market," Management Science, INFORMS, vol. 61(9), pages 2220-2240, September.
    • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:9:p:2220-2240
    DOI: 10.1287/mnsc.2014.2002
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    More about this item

    Keywords

    collateral valuation; lending; banks; loans; default; financial crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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