“Foreclosure Auctions”

Pai Xu, The University of Hong Kong 

We develop a novel theory of real estate foreclosure auctions, which have the special feature that the lender acts as a seller for low prices and as a buyer for high prices. The theory yields several empirically testable predictions in relation to the strategic behavior of agents when the lender has an informational advantage about the quality of the property. Using novel data from Palm Beach County (FL, US), we find evidence that the lender has an informational advantage. Asymmetric information is found to be relevant in the two applications of our theory we investigate: mortgage securitization and integrated lenders.