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

Author

Listed:
  • Agarwal, Sumit

    (National University of Singapore)

  • Ben-David, Itzhak

    (OH State University)

  • Yao, Vincent

    (Fannie Mae)

Abstract

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.

Suggested Citation

  • Agarwal, Sumit & Ben-David, Itzhak & Yao, Vincent, 2012. "Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real-Estate Market," Working Paper Series 2012-29, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2012-29
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    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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