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

Agarwal, Sumit; Ben-David, Itzhak; Yao, Vincent

doi:10.2139/ssrn.2367433

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

47 Pages Posted: 15 Dec 2013

See all articles by Sumit Agarwal

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Vincent Yao

Georgia State University - J. Mack Robinson College of Business

There 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: Suggested Citation

Agarwal, Sumit and Ben-David, Itzhak and Yao, Vincent, 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