How Multiple Creditors, Market Liquidity and Homeowner Participation Affect Foreclosure Discounts

Abstract This study investigates how multiple subordinated creditors and market liquidity in the local real estate market influence the foreclosure discount. It also explores differences in homeowner participation. We use a complete record of all forced Norwegian house sales between December 2001 and February 2018, with and without homeowner participation in response to default on a mortgage or subordinated claim. We estimate foreclosure discounts using an advanced statistical valuation model and repeated sales to explore differences between these approaches. This study expands previous research by exploring the direct and indirect effects of subordinated claims and market liquidity, homeowner participation incentives, and homeowner participation’s impact on the foreclosure discount. Homeowners in liquid markets are more likely to participate in a soft foreclosure sale, thus reducing the foreclosure discount significantly. Default on subordinated claims increases the foreclosure discount, partially through reduced homeowner participation. Our results demonstrate the importance of including the severity of indebtedness and homeowner participation in research on biased valuations and relate the observed foreclosure discount to differences in homeowner participation and market liquidity. JEL— G21, R2, R51