article

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

Authors:

Itzhak Ben-David,

Vincent YaoAuthors Info & Claims

Management Science, Volume 61, Issue 9

Pages 2220 - 2240

https://doi.org/10.1287/mnsc.2014.2002

Published: 01 September 2015 Publication History

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.

This paper was accepted by Wei Jiang, finance.

References

[1]

Agarwal S, Ben-David I (2012) Do loan officers' incentives lead to lax lending standards? Working paper, Ohio State University, Columbus.

[2]

Agarwal S, Chang Y, Yavas A (2012) Adverse selection in mortgage securitization. J. Financial Econom. 105(3):640-660.

[3]

Agarwal S, Lucca D, Seru A, Trebbi F (2014a) Inconsistent regulators: Evidence from banking. Quart. J. Econom. 129(2):889-938.

[4]

Agarwal S, Amromin G, Ben-David I, Chomsisengphet S, Evanoff D (2011) The role of securitization in mortgage renegotiation. J. Financial Econom. 102(3):559-578.

[5]

Agarwal S, Amromin G, Ben-David I, Chomsisengphet S, Evanoff D (2014b) Predatory lending and the subprime crisis. J. Financial Econom. 113(1):29-52.

[6]

Agarwal S, Amromin G, Ben-David I, Chomsisengphet S, Seru A, Piskorski T (2013) Policy intervention in debt renegotiation: Evidence from the Home Affordable Modification Program. Working paper, National University of Singapore, Singapore.

[7]

Aghion P, Bolton P (1992) An incomplete contracts approach to financial contracting. Rev. Econom. Stud. 59(3):473-494.

[8]

Allen L, Jagtiani J, Peristiani S, Saunders A (2004) The role of bank advisors in mergers and acquisitions. J. Money, Credit, Banking 36(2):197-224.

[9]

Ambrose BW, Capone CA (1998) Modeling the conditional probability of foreclosure in the context of single-family mortgage default resolutions. Real Estate Econom. 26(3):391-429.

[10]

Ben-David I (2011) Financial constraints and inflated home prices during the real-estate boom. Amer. Econom. J.: Appl. Econom. 3(3):55-78.

[11]

Benmelech E, Bergman N (2009) Collateral pricing. J. Financial Econom. 91(3):339-360.

[12]

Benmelech E, Garmaise MJ, Moskowitz TJ (2005) Do liquidation values affect financial contracts? Evidence from commercial loan contracts and zoning regulation. Quart. J. Econom. 120(3): 1121-1154.

[13]

Berger A, Espinosa-Vega MA, Frame WS, Miller NH (2011) Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information. J. Financial Intermediation 20(1):55-70.

[14]

Berger AN, Udell GF (1990) Collateral, loan quality and bank risk. J. Monetary Econom. 25(1):21-42.

[15]

Bolton P, Freixas X, Shapiro J (2007) Conflicts of interest, information provision, and competition in the financial services industry. J. Financial Econom. 85(2):297-330.

[16]

Borak D (2010) Rules set for "independent" appraisers. American Banker (December 2), http://www.americanbanker.com/issues/175_231/rules-set-for-indy-appraisers-1029349-1.html.

[17]

Campbell JY, Giglio S, Pathak P (2011) Forced sales and house prices. Amer. Econom. Rev. 101(5):2108-2131.

[18]

Case KE, Shiller RJ (1990) Forecasting prices and excess returns in the housing market. Real Estate Econom. 18(3):253-273.

[19]

Chan Y-S, Thakor AV (1987) Collateral and competitive equilibria with moral hazard and private information. J. Finance 42(2):345-363.

[20]

Cho M, Megbolugbe IF (1996) An empirical analysis of property appraisal and mortgage redlining. J. Real Estate Finance Econom. 13(1):45-55.

[21]

Deng Y, Quigley J, Van Order R (2000) Mortgage terminations, heterogeneity and the exercise of mortgage options. Econometrica 68(2):275-307.

[22]

Elul R, Souleles NS, Chomsisengphet S, Glennon D, Hunt R (2010) What "triggers" mortgage default? Amer. Econom. Rev.: Papers Proc. 100(2):490-494.

[23]

Fannie Mae (2012) Fannie Mae appraisal messaging notification, November 27, 2012, https://www.fanniemae.com/content/news/appraisal-messaging-notification.pdf.

[24]

Federal Reserve (2010) Press release, October 18, 2010. http://www.federalreserve.gov/newsevents/press/bcreg/20101018a.htm.

[25]

Freddie Mac (2014) Postsettlement delivery fees. Bulletin 2014-2, February 14, 2014, http://www.freddiemac.com/singlefamily/pdf/ex19.pdf.

[26]

Freifeld K (2012) WaMu appraisal company settles with New York. Reuters (September 27), http://www.reuters.com/article/2012/09/28/us-appraisal-settlement-idUSBRE88R02520120928.

[27]

Garmaise MJ (2015) Borrower misreporting and loan performance. J. Finance 70(1):449-484.

[28]

Genesove D, Mayer CJ (1997) Equity and time to sale in the real estate market. Amer. Econom. Rev. 87(3):255-269.

[29]

Genesove D, Mayer C (2001) Loss aversion and seller behavior: Evidence from the housing market. Quart. J. Econom. 116(4): 1233-1260.

[30]

Gorton G, Pennacchi G (1995) Banks and loan sales: Marketing non-marketable assets. J. Monetary Econom. 35(3):389-411.

[31]

Greenspan A, Kennedy J (2008) Sources and uses of equity extracted from homes. Oxford Rev. Econom. Policy 24(1):120-144.

[32]

Griffin JM, Maturana G (2015) Who facilitated misreporting in securitized loans? J. Finance. Forthcoming.

[33]

Harding JP, Rosenblatt E, Yao V (2009) The contagion of the foreclosed properties. J. Urban Econom. 66(3):164-178.

[34]

Harding JP, Rosenblatt E, Yao V (2012) The foreclosure discount: Myth or reality? J. Urban Econom. 71(2):204-218.

[35]

Hart O (1995) Firms, Contracts, and Financial Structure (Oxford University Press, Oxford, UK).

[36]

Hart O, Moore J (1994) A theory of debt based on the inalienability of human capital. Quart. J. Econom. 109(4):841-879.

[37]

Hart O, Moore J (1998) Default and renegotiation: A dynamic model of debt. Quart. J. Econom. 113(1):1-41.

[38]

Haughwout A, Lee D, Tracy J, van de Klaauw W (2011) Real estate investors, the leverage cycle, and the housing market crisis. Staff Report 514, Federal Reserve Bank of New York, New York.

[39]

Holmstrom B, Tirole J (1997) Financial intermediation, loanable funds, and the real sector. Quart. J. Econom. 112(3):663-691.

[40]

Inderst R, Mueller HM (2007) A lender-based theory of collateral. J. Financial Econom. 84(3):826-859.

[41]

Jiang W, Nelson AA, Vytlacil E (2014) Liar's loan? Effects of origination channel and information falsification on mortgage delinquency. Rev. Econom. Statist. 96(1):1-18.

[42]

Johnson H, Stulz RM (1985) An analysis of secured debt. J. Financial Econom. 14(4):501-521.

[43]

Kelly A (2007) Appraisals, automated valuation models, and mortgage default. Working paper, Federal Housing Finance Agency, Washington, DC.

[44]

Keys BJ, Mukherjee TK, Seru A, Vig V (2010) Did securitization lead to lax screening? Evidence from subprime loans. Quart. J. Econom. 125(1):307-362.

[45]

Korteweg A, Sorensen M (2015) Estimating loan-to-value distributions. Real Estate Econom. Forthcoming.

[46]

Lacour-Little M, Malpezzi S (2003) Appraisal quality and residential mortgage default: Evidence from Alaska. J. Real Estate Finance Econom. 27(2):211-233.

[47]

Mayer C, Pence K, Sherlund S (2009) The rise in mortgage defaults. J. Econom. Perspect. 23(1):27-50.

[48]

Mian A, Sufi A (2010) Household leverage and the recession of 2007 to 2009. IMF Econom. Rev. 58(1):74-117.

[49]

Michaely R, Womack K (1999) Conflict of interest and the credibility of underwriter analyst recommendations. Rev. Financial Stud. 12(4):653-686.

[50]

Pennacchi G (1988) Loan sales and the cost of bank capital. J. Finance 43(2):375-396.

[51]

Petersen MA (2004) Information: Hard and soft. Working paper, Northwestern University, Evanston, IL.

[52]

Piskorski T, Seru A, Vig V (2010) Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis. J. Financial Econom. 97(3):369-397.

[53]

Piskorski T, Seru A, Witkin J (2015) Asset quality misrepresentation by financial intermediaries: Evidence from RMBS market. J. Finance. Forthcoming.

[54]

Rajan U, Seru A, Vig V (2015) The failure of models that predict failure: Distance, incentives and default. J. Financial Econom. 115(2):237-260.

[55]

Tirole J (2005) The Theory of Corporate Finance (Princeton University Press, Princeton, NJ).

[56]

Vig V (2013) Access to collateral and corporate debt structure: Evidence from a natural experiment. J. Finance 68(3): 881-928.

[57]

White LJ (2010) The credit rating agencies. J. Econom. Perspect. 24(2):211-226.

[58]

Zingales L (2012) A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (Basic Books, New York).

Cited By

Mayordomo SRachedi ORodríguez Moreno M(2024)Bank Regulatory Capital ArbitrageManagement Science10.1287/mnsc.2023.480570:4(2255-2271)Online publication date: 1-Apr-2024
https://dl.acm.org/doi/10.1287/mnsc.2023.4805
Agarwal SAng SDeng YWang Y(2021)Mortgage Brokers and the Effectiveness of Regulatory OversightsManagement Science10.1287/mnsc.2020.370167:8(5278-5300)Online publication date: 1-Aug-2021
https://dl.acm.org/doi/10.1287/mnsc.2020.3701
Kruger SMaturana G(2021)Collateral Misreporting in the Residential Mortgage-Backed Security MarketManagement Science10.1287/mnsc.2019.356967:5(2729-2750)Online publication date: 1-May-2021
https://dl.acm.org/doi/10.1287/mnsc.2019.3569
Show More Cited By

Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market
1. Applied computing
  1. Law, social and behavioral sciences

Recommendations

Age of Decision: Pension Savings Withdrawal and Consumption and Debt Response
This paper exploits an administrative regulation in Singapore that allows individuals to withdraw between 10% and 30% of their pension savings at age 55. We find a large and highly significant increase in individuals’ bank account balances within the ...
Agency theory and the financial crisis from a strategic perspective

The financial credit crash of 2007 and 2008, based on various explanations of debt derivatives and housing bubbles that caused many financial institutions to lend money to those who could not repay, has its foundations in agency theory and faulty ...
Optimal investment risks and debt management with backup security in a financial crisis

This paper examines a theoretical and an empirical study of an optimal investment management strategies and debt profile of an investor in a financial crisis. In order to minimize the incident of credit risks, the debts are backup with collaterals. The ...

Comments

Please enable JavaScript to view thecomments powered by Disqus.

Information & Contributors

Information

Published In

cover image Management Science

Management Science Volume 61, Issue 9

September 2015

271 pages

ISSN:0025-1909

Issue’s Table of Contents

Publisher

INFORMS

Linthicum, MD, United States

Publication History

Published: 01 September 2015

Accepted: 21 December 2013

Received: 31 July 2013

Author Tags

Qualifiers

Article

Contributors

Other Metrics

View Article Metrics

Bibliometrics & Citations

Bibliometrics

Article Metrics

5
Total Citations
View Citations
0
Total Downloads

Downloads (Last 12 months)0
Downloads (Last 6 weeks)0

Reflects downloads up to 22 Sep 2024

Other Metrics

View Author Metrics

Citations

Cited By

Mayordomo SRachedi ORodríguez Moreno M(2024)Bank Regulatory Capital ArbitrageManagement Science10.1287/mnsc.2023.480570:4(2255-2271)Online publication date: 1-Apr-2024
https://dl.acm.org/doi/10.1287/mnsc.2023.4805
Agarwal SAng SDeng YWang Y(2021)Mortgage Brokers and the Effectiveness of Regulatory OversightsManagement Science10.1287/mnsc.2020.370167:8(5278-5300)Online publication date: 1-Aug-2021
https://dl.acm.org/doi/10.1287/mnsc.2020.3701
Kruger SMaturana G(2021)Collateral Misreporting in the Residential Mortgage-Backed Security MarketManagement Science10.1287/mnsc.2019.356967:5(2729-2750)Online publication date: 1-May-2021
https://dl.acm.org/doi/10.1287/mnsc.2019.3569
Demiroglu CJames C(2018)Indicators of Collateral MisreportingManagement Science10.1287/mnsc.2016.259764:4(1747-1760)Online publication date: 1-Apr-2018
https://dl.acm.org/doi/10.1287/mnsc.2016.2597
Agarwal SRosen RYao V(2016)Why Do Borrowers Make Mortgage Refinancing Mistakes?Management Science10.1287/mnsc.2015.227262:12(3494-3509)Online publication date: 1-Dec-2016
https://dl.acm.org/doi/10.1287/mnsc.2015.2272

View Options

View options

Get Access

Login options

Check if you have access through your login credentials or your institution to get full access on this article.

Full Access

Get this Publication

Media

Figures

Other

Tables

View Issue’s Table of Contents