Working Paper: NBER ID: w19606
Authors: Sumit Agarwal; Itzhak Bendavid; Vincent Yao
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; however, lenders partly account for the valuation bias through pricing.
Keywords: Collateral Valuation; Borrower Financial Constraints; Residential Real Estate Market
JEL Codes: D03; D1; D10; D12; D14; D18; G01; G02; G17; G2; G21; G23; G30; K20; L85; R2; R21; R3; R31; R51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| valuation bias (D91) | default risk (G33) |
| valuation bias (D91) | lender interest rates (E43) |
| borrower leverage (G51) | valuation bias (D91) |
| valuation bias increases with borrower leverage (G51) | default likelihood (C51) |
| inflated valuations (G19) | borrowing capacity (H74) |
| borrower leverage (G51) | valuation bias (D91) |