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

  • Sumit Agarwal
  • Itzhak Ben-David
  • Vincent Yao

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; however, lenders partly account for the valuation bias through pricing.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19606.

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Date of creation: Oct 2013
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Publication status: published as “Collateral Valuation and Institutional Pressures: Evidence from the Residential Real-Estate Market” (with Ben-David, Z., and V. Yao), Management Science, 2015, Vol. 61(9), Pp.2220-2240
Handle: RePEc:nbr:nberwo:19606
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