NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Second Liens and the Holdup Problem in Mortgage Renegotiation

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

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

Loss mitigation actions (e.g., liquidation or renegotiation) for delinquent mortgages might be hampered by the conflicting goals of claim holders with different levels of seniority. Although similar agency problems arise in corporate bankruptcies, the mortgage market is unique because in a large share of cases junior claimants, in their role as servicers, exercise operational control over loss mitigation actions on mortgages owned by senior claimants. We show that servicers are less likely to act on the first lien mortgage owned by investors when they themselves own the second lien claim secured by the same property. When they do act, such servicers' choices are skewed towards actions that maximize the value of their junior claims, favoring modification over liquidation and short sales and deeds-in-lieu over foreclosures. We also show that such servicers find it more difficult to avoid taking actions on second lien loans when first liens are modified and that they do not modify their second lien loans on more concessionary terms. We show that these actions transfer wealth from first to second liens and moderately increase borrower welfare.

download in pdf format
   (250 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20015

Users who downloaded this paper also downloaded* these:
Hockenberry and Helmchen w20017 The Nature of Surgeon Human Capital Depreciation
Bolton, Chen, and Wang w20009 Debt, Taxes, and Liquidity
Agarwal, Amromin, Ben-David, Chomsisengphet, Piskorski, and Seru w18311 Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program
Stiglitz w20014 Intellectual Property Rights, the Pool of Knowledge, and Innovation
Agrawal, McHale, and Oettl w20012 Why Stars Matter
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us