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 article 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. Copyright 2008 American Real Estate and Urban Economics Association

How does statutory redemption affect a buyer's decision at the foreclosure sale?

“…We suggest that "the average number of auctions being taken place for settling down a foreclosed property" could be such a proxy. For the independent variables, we suggest that researchers can collect the state-level data on the statutory redemption period from Baker, Miceli, and Sirmans (2008), and the metropolitan-level data on the housing price volatility from Miller and Peng (2004). We, however, leave future work to test our predictions.…”

“…We choose a set of parameter values as the benchmark case to make our results in the last section more vivid. We assume that the statutory redemption period lasts for one year, i.e., 1 T  , which is implemented by several states in the U.S. (Baker, Miceli, and Sirmans, 2008).…”

“…Even if the foreclosure sale takes place, the mortgagor may still have a statutory right to redeem the property by paying the price set at the foreclosure sale. About one third of states in the U.S. provide for statutory redemption, with the period ranging from one month to one year (Baker, Miceli, and Sirmans, 2008).…”

“…Two recent papers byMiceli and Sirmans (2005) andBaker, Miceli, and Sirmans (2008) do not distinguish equitable redemption from statutory redemption. Both papers build a static model and find that an increase in the length of redemption period will reduce a mortgagor's incentive to devote efforts to avoid default.…”

Do Pre-Sale and Post-Sale Foreclosure Statutes Impact Foreclosure Starts?

“…Mortgagor protection laws have a much smaller effect on state interest rates than previous studies indicate. Baker, Miceli and Sirmans (2008) developed an economic analysis of mortgage redemption laws in the United States. Their paper develops a theory that explains these laws as a means of protecting landowners against the loss of non-transferable values associated with their land.…”