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NBER Working Papers and Publications
|March 2014||Second Liens and the Holdup Problem in Mortgage Renegotiation|
with Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet: w20015
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...