NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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):   AP   CF   LE   LS   POL

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

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