Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market
Charles A. Dice Center Working Paper No. 2012-11
47 Pages Posted: 2 Jul 2012 Last revised: 10 Feb 2014
Date Written: October 30, 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; however, lenders partly account for the valuation bias through pricing.
Keywords: collateral valuation, institutional pressure, lending, banks, loans, default, financial crisis
JEL Classification: G01, G21
Suggested Citation: Suggested Citation