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

Holdup by Junior Claimholders: Evidence from the Mortgage Market

“…7 See Bond et al (2017) for an extensive analysis of the second-lien holdup problem in the context of mortgage refinancing.…”

“…Consequently, the junior (older) lien can hold up the decision of the more senior (newer) lien. The effects of these laws are studied by Bond, Elul, Garyn-Tal, and Musto (2017).…”

Holdup by Junior Claimholders: Evidence from the Mortgage Market

“…Consequently, the junior lien (older) can hold up the decision of the more senior (newer lien). The effects of these laws are studied in Bond, Elul, Garyn, and Musto (2017).…”

How Do Mortgage Refinances Affect Debt, Default, and Spending? Evidence from HARP

“…Our take-up analysis ties us to the household finance literature that has sought to understand why many households fail to refinance despite what appear to be clear benefits from doing so (e.g. Agarwal et al 2015, Andersen et al 2017, Bond et al 2017, Campbell 2006, Johnson et al 2015. Finally, our results should also inform the recent literature on mortgage design.…”

“…A caveat, studied in depth byBond et al (2017), is that in many cases, HARP borrowers with junior liens had to obtain a resubordination agreement from the lender of the junior lien. This could be hard if the lenders were difficult to contact or used their ability to hold up the process in an attempt to extract surplus.13 For further details, see Federal Housing Finance Agency Office of Inspector General (2013).…”