Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real-Estate Market.” Available at http://www.nber.org/papers/w19606

Financially constrained borrowers have the incentive to influence the appraisal process in order to increase borrowing or reduce the interest rate. 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 partially account for the valuation bias through pricing