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Holdup by Junior Claimholders: Evidence from the Mortgage Market

Published online by Cambridge University Press:  31 August 2018

Sumit Agarwal ,
Gene Amromin ,
Itzhak Ben-David ,
Souphala Chomsisengphet  and
Yan Zhang
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Abstract

When borrowers are delinquent, senior debtholders prefer liquidation, whereas junior debtholders prefer to maintain their option value by delaying resolution or modifying the loan. In the mortgage market, a conflict of interest (“holdup”) arises when servicers of securitized senior liens are also the owners of the junior liens on the same property. We show that holdup servicers are able to delay action on the first-lien mortgage. When they do act, servicers are more likely to choose resolutions that maintain their option value, favoring modification and soft foreclosures over outright foreclosures. Holdup behavior is more likely to result in borrower self-curing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 1 , February 2019 , pp. 247 - 274
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

The authors thank Fredrik Andersson, Gadi Barlevy, Ted Durant, Ronel Elul (the referee), Karen Furst, Dennis Glennon, Bruce Krueger, Mark Levonian, Paul Malatesta (the editor), Amit Seru, and seminar participants at the OCC, Financial Intermediation Research Society (FIRS), and American Real Estate and Urban Economics Association (AREUEA) (Chicago) for helpful comments and suggestions. The views in this article are those of the authors and may not reflect those of the Federal Reserve System, the Federal Reserve Bank of Chicago, or the Office of the Comptroller of the Currency.

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