The Value of Equitable Redemption in Commercial Mortgage Contracting

Posted: 11 Sep 2007

See all articles by Lynn M. Fisher

Lynn M. Fisher

Mortgage Bankers Association

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Abstract

Equitable redemption is a feature of all common law mortgages that allows a borrower a chance to redeem the real estate in the event of default. What is puzzling is that equitable redemption is universally enforced in all mortgages, including commercial mortgages. The purpose of this study is to understand if there might be conditions under which the universal enforcement of equitable redemption could be an efficient legal doctrine. We build a model of asymmetric information where the cash flows from the investment are known to the borrower but not to the lender. We show that there exists a separating equilibrium where high-risk borrowers choose to include equitable redemption (and pay a higher interest rate) while low-risk borrowers choose not to (and pay a lower interest rate). We then show that there exist conditions under which a universal enforcement of equitable redemption results in a higher surplus than this separating equilibrium.

Keywords: equitable redemption, asymmetric information, commercial mortgages, separating equilibrium

Suggested Citation

Fisher, Lynn M. and Yavas, Abdullah, The Value of Equitable Redemption in Commercial Mortgage Contracting. Journal of Real Estate Finance and Economics, Vol. 35, No. 4, 2007. Available at SSRN: https://ssrn.com/abstract=1010346

Lynn M. Fisher

Mortgage Bankers Association ( email )

1919 M Street NW
Washington, DC 20006-3404
United States

Abdullah Yavas (Contact Author)

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

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