NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Holdup by Junior Claimholders: Evidence from the Mortgage Market

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

NBER Working Paper No. 20015
Issued in March 2014, Revised in November 2017
NBER Program(s):CF

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.

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Document Object Identifier (DOI): 10.3386/w20015

Published: Accepted at Journal of Financial and Quantitative Analysis (JFQA)

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