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

42 Pages Posted: 26 Dec 2012

See all articles by Philip Bond

Philip Bond

University of Washington - Michael G. Foster School of Business

Ronel Elul

Federal Reserve Bank of Philadelphia

Sharon Garyn-Tal

Max Stern Academic College of Emek Yezreel

David K. Musto

University of Pennsylvania - Finance Department

Date Written: December 24, 2012

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: Refinance, Mortgage

JEL Classification: D12, G18, H73, K11

Suggested Citation

Bond, Philip and Elul, Ronel and Garyn-Tal, Sharon and Musto, David K., Does Junior Inherit? Refinancing and the Blocking Power of Second Mortgages (December 24, 2012). FRB of Philadelphia Working Paper No. 13-3, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2193951 or http://dx.doi.org/10.2139/ssrn.2193951

Philip Bond (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Ronel Elul

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3965 (Phone)

Sharon Garyn-Tal

Max Stern Academic College of Emek Yezreel ( email )

Emek Yezreel, 19300
Yezreel 19300
Israel

David K. Musto

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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