Does Junior Inherit? Refinancing and the Blocking Power of Second Mortgages
42 Pages Posted: 26 Dec 2012
Date Written: December 24, 2012
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: Suggested Citation