Renegotiation in the Common Law Mortgage and the Impact of Equitable Redemption

Renegotiation in the Common Law Mortgage and the Impact of Equitable Redemption This paper seeks to fill a gap in the real estate finance literature by linking the well-known history of the Anglo–American mortgage recorded by legal scholars with the recent literature on security design and incomplete contracting in order to explain and evaluate several unique features of the mortgage. In particular, we investigate how a conditional transfer of ownership to a lender and the institution called the equity of redemption affect mortgage renegotiation and therefore the value of mortgaged real estate. Given the governance of the common law mortgage, we show that a mortgagor may not be able to renegotiate his mortgage debt in order delay repayment when faced with a re-investment opportunity during the life of the mortgage. The failure to optimally renegotiate the mortgage does not necessarily result in foreclosure but may result in underinvestment. Therefore, an additional period of time between default and foreclosure, known as a period of equitable redemption, may allow the mortgagor to accrue sufficient cash flow to not only avoid foreclosure but to mitigate underinvestment in non-default states. Since this extra period of time may not be achievable ex post due to a hold-up problem, its inclusion ex ante may be welfare improving. The Journal of Real Estate Finance and Economics Springer Journals

Renegotiation in the Common Law Mortgage and the Impact of Equitable Redemption

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Kluwer Academic Publishers
Copyright © 2006 by Springer Science + Business Media, Inc.
Economics; Regional/Spatial Science; Financial Services
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