An Economic Theory of Mortgage Redemption Laws

Abstract

Redemption laws give mortgagors the right to redeem their property following default for a statutorily set period of time. This paper develops a theory that explains these laws as a means of protecting landowners against the loss of nontransferable values associated with their land. A longer redemption period reduces the risk that this value will be lost but also increases the likelihood of default. The optimal redemption period balances these effects. Empirical analysis of cross-state data from the early twentieth century suggests that these factors, in combination with political considerations, explain the existence and length of redemption laws. Journal of Economic Literature Classification: G21, K11Keywords: Mortgage redemption, default, subjective valueWe acknowledge the very helpful comments of two reviewers.

Factors underlying short sales

“…8 The redemption price typically is the purchase price at the foreclosure auction plus interest and certain fees. 9 The original intention of the statutory right of redemption was to allow the borrower extra time to work out financing and retain the house as well as to ensure a fair foreclosure auction sale price (Baker et al, 2008;Hart, 1964). With this option, the borrower may choose to redeem the house if the house price increases after the auction sale, if the redemption price is significantly lower than the fair market value, or whenever the borrower obtains a positive utility by paying off the purchaser and retaining the property.…”

The Value of Equitable Redemption in Commercial Mortgage Contracting

“…It should also be noted that the equitable right of redemption is distinct from a statutory right of redemption provided to mortgagors in some states (Hurwitz 2004). Baker et al (2004) assert that 17 states have statutory rights of redemption which allow mortgagors between 1 month and 1 year following a foreclosure sale to redeem real estate.…”