We develop a novel theory of real estate foreclosure auctions, which have the special
feature that the lender acts as a seller for low and as a buyer for high prices. We get three
predictions: (i) lenders' bids are bunched at the amount owed, (ii) if all auctions observed
exhibit a common value component, there are gaps in lenders' bids, (iii) if there are both
independent private values and common value component auctions, there will be no gaps,
but non-monotonicity of the probability of sale in the reserve price. Using novel data from
Palm Beach County (US), we show that (i) and (iii), but not (ii) are consistent with the
data. Further, the data is consistent with the claim that adverse selection plays less of a
role for securitized than for non-securitized mortgages. Our theory also allows an analysis
of the welfare effect of judicial versus non-judicial foreclosures.
