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

  • Agarwal, Sumit

    (National University of Singapore)

  • Ben-David, Itzhak

    (OH State University)

  • Yao, Vincent

    (Fannie Mae)

Financially-constrained borrowers have the incentive to influence the appraisal process in order to increase borrowing or reduce the interest rate. The average valuation bias for residential refinance transactions is above 5%. The bias is larger for highly leveraged transactions, and for transactions mediated through a broker, especially where competition is high. Mortgages with inflated valuations default more often; however, lenders partially account for the valuation bias through pricing.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2012-29.

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Date of creation: Dec 2012
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Handle: RePEc:ecl:ohidic:2012-29
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