Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market
National University of Singapore
Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)
Vincent W. Yao
Georgia State University - J. Mack Robinson College of Business
December 13, 2013
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. Lenders account for 60-90% of the bias through pricing.
Number of Pages in PDF File: 47
Keywords: collateral valuation, lending, banks, loans, default, financial crisis
JEL Classification: G01, G21
Date posted: December 15, 2013
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