We develop a simple model of the housing market in which financial imperfections can serve to stabilize aggregate fluctuations, and not necessarily aggravate them as in much of the previous literature; we term this a financial decelerator. Stabilization can occur in our model because lenders are imperfectly informed as to borrowers' propensity to default. As a result, it is too costly for lenders to impose borrowing constraints that guarantee repayment in every possible eventuality. This allows some borrowers to default when house prices are low, thereby leaving them with more wealth. This then serves as an endogenous stabilizing force.

What "Triggers" Mortgage Default? by Ronel Elul, Nicholas S. Souleles, Souphala Chomsisengphet, Dennis Glennon and Robert Hunt. Published in volume 100, issue 2, pages 490-94 of American Economic Review, May 2010

In most U.S. states, mortgage seniority follows time priority: older mortgages are paid first. This potentially impedes refinancing of senior mortgages because replacement mortgages are junior unless the existing junior lienholders consent to resubordination. We exploit legal variation across states to provide evidence that time priority reduces refinancing, especially of smaller mortgages (suggesting a significant fixed cost of obtaining resubordination) and of mortgages close to the conforming loan limit. On the contrary, we find evidence that time priority renders second mortgages more valuable to lenders, increasing the likelihood that a borrower obtains a second mortgage. Received May 20, 2013; editorial decision June 8, 2016 by Editor Laura Starks