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

Abstract

In most states, the law grants seniority to the oldest mortgage on a house, unless that mortgagee subordinates its claim. We show that this practice significantly impedes the refinancing of first mortgages by imparting blocking power to junior mortgagees. We identify the effect by building a database showing all mortgages of a large panel of homeowners, identifying those whose combined loan-to-value makes them candidates for refinancing their first mortgages, and contrasting the incidence of refinancing between the states following this standard and the states following an alternate standard by which a mortgage inherits the seniority of the mortgage it replaces. JEL: D12, G18, H73, K11 1 Thanks to Dale Whitman for providing the database of state legal environments and to Mathan Glezer and Joe Silverstein for outstanding research assistance. For their helpful comments, we also thank

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