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

47 Pages Posted: 15 Dec 2013  

Sumit Agarwal

Georgetown University - Department of Finance

Itzhak Ben-David

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

Multiple version iconThere are 3 versions of this paper

Date Written: December 13, 2013

Abstract

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.

Keywords: collateral valuation, lending, banks, loans, default, financial crisis

JEL Classification: G01, G21

Suggested Citation

Agarwal, Sumit and Ben-David, Itzhak and Yao, Vincent W., Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market (December 13, 2013). Available at SSRN: https://ssrn.com/abstract=2367433 or http://dx.doi.org/10.2139/ssrn.2367433

Sumit Agarwal (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Vincent W. Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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