Does junior inherit? Refinancing and the blocking power of second mortgages

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

No 13-03, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Refinancing a first mortgage puts legal principles in conflict when other, junior, liens also exist. On one hand, the principle that seniority follows time priority leaves the new refinancing mortgage junior to mortgages that were junior to the original, refinanced first mortgage. On the other hand, the principle of equitable subrogation gives the refinancing mortgage the seniority of the claim it paid down. States resolve this tension differently, thus differentiating how much a second mortgage impedes refinancing of the first. We exploit this cross-state variation to identify the impact on mortgage refinancing and find that refinancing is significantly more likely in the states following the principle of equitable subrogation when the homeowner also has a second mortgage.

Keywords: Mortgage loans; Mortgages (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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