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

Author

Listed:
  • Philip Bond
  • Ronel Elul
  • Sharon Garyn-Tal
  • David K. Musto

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

Suggested Citation

  • Philip Bond & Ronel Elul & Sharon Garyn-Tal & David K. Musto, 2017. "Does Junior Inherit? Refinancing and the Blocking Power of Second Mortgages," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 211-244.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:1:p:211-244.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw079
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    Cited by:

    1. Anthony A. Defusco & John Mondragon, 2020. "No Job, No Money, No Refi: Frictions to Refinancing in a Recession," Journal of Finance, American Finance Association, vol. 75(5), pages 2327-2376, October.
    2. Andreas Fuster & Matthew Plosser & Philipp Schnabl & James Vickery, 2019. "The Role of Technology in Mortgage Lending," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1854-1899.
    3. Joshua Abel & Andreas Fuster, 2021. "How Do Mortgage Refinances Affect Debt, Default, and Spending? Evidence from HARP," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 254-291, April.
    4. Milonas, Kristoffer, 2017. "The effect of foreclosure laws on securitization: Evidence from U.S. states," Journal of Financial Stability, Elsevier, vol. 33(C), pages 1-22.
    5. Matteo Benetton & Philippe Bracke & João F Cocco & Nicola Garbarinoifo, 2022. "Housing Consumption and Investment: Evidence from Shared Equity Mortgages," The Review of Financial Studies, Society for Financial Studies, vol. 35(8), pages 3525-3573.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law

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