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

Philip Bond, Ronel Elul, Sharon Garyn-Tal and David K. Musto

The Review of Financial Studies, 2017, vol. 30, issue 1, 211-244

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

JEL-codes: D12 G18 H73 K11 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (7)

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