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

Sumit Agarwal, Itzhak Ben-David, Vincent Yao

NBER Working Paper No. 19606
Issued in October 2013
NBER Program(s):Asset Pricing, Corporate Finance, Law and Economics, Labor Studies, Political Economy

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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Document Object Identifier (DOI): 10.3386/w19606

Published: “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 citation courtesy of

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