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Review of Financial Studies Vol. 30 No. 1 2017

Does Junior Inherit? Refinancing and the Blocking Power of Second Mortgages

Philip L. Bond1; Ronel Elul2; Sharon Garyn-Tal; David K. Musto3

1 University of Washington · 2 Federal Reserve Bank of Philadelphia · 3 University of Pennsylvania

Abstract

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

DOI
10.1093/rfs/hhw079
Volume
30
Issue
1
Pages
211-244
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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