Renegotiation in the Common Law Mortgage and the Impact of Equitable Redemption
This paper seeks to fill a gap in the real estate finance literature by linking the well-known history of the Anglo–American mortgage recorded by legal scholars with the recent literature on security design and incomplete contracting in order to explain and evaluate several unique features of the mortgage. In particular, we investigate how a conditional transfer of ownership to a lender and the institution called the equity of redemption affect mortgage renegotiation and therefore the value of mortgaged real estate. Given the governance of the common law mortgage, we show that a mortgagor may not be able to renegotiate his mortgage debt in order delay repayment when faced with a re-investment opportunity during the life of the mortgage. The failure to optimally renegotiate the mortgage does not necessarily result in foreclosure but may result in underinvestment. Therefore, an additional period of time between default and foreclosure, known as a period of equitable redemption, may allow the mortgagor to accrue sufficient cash flow to not only avoid foreclosure but to mitigate underinvestment in non-default states. Since this extra period of time may not be achievable ex post due to a hold-up problem, its inclusion ex ante may be welfare improving. Copyright Springer Science + Business Media, Inc. 2006
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ambrose, Brent W & Buttimer, Richard J, Jr, 2000.
"Embedded Options in the Mortgage Contract,"
The Journal of Real Estate Finance and Economics,
Springer, vol. 21(2), pages 95-111, September.
- Aghion, Philippe & Hermalin, Benjamin, 1990.
"Legal Restrictions on Private Contracts Can Enhance Efficiency,"
Journal of Law, Economics and Organization,
Oxford University Press, vol. 6(2), pages 381-409, Fall.
- Aghion, P. & Hermalin, B., 1990. "Legal Restrictions on Private Contracts Can Enhance Efficiency," DELTA Working Papers 90-14, DELTA (Ecole normale supérieure).
- Huberman, Gur & Kahn, Charles M, 1988. "Limited Contract Enforcement and Strategic Renegotiation," American Economic Review, American Economic Association, vol. 78(3), pages 471-84, June.
- Matthew J. Baker & Thomas J. Miceli & C. F. Sirmans, 2006.
"An Economic Theory of Mortgage Redemption Laws,"
2006-25, University of Connecticut, Department of Economics.
- Huberman, Gur & Kahn, Charles M., 1988. "Strategic renegotiation," Economics Letters, Elsevier, vol. 28(2), pages 117-121.
- Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
- Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 1-41.
- John P. Harding & C.F. Sirmans, 2002. "Renegotiation of Troubled Debt: The Choice between Discounted Payoff and Maturity Extension," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(3), pages 475-503.
- James B. Kau & Taewon Kim, 1994. "Waiting to Default: The Value of Delay," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(3), pages 539-551.
When requesting a correction, please mention this item's handle: RePEc:kap:jrefec:v:32:y:2006:i:1:p:61-82. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.