Holdup by Junior Claimholders: Evidence from the Mortgage Market

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.

Agarwal, Sumit and Amromin, Gene and Ben-David, Itzhak and Chomsisengphet, Souphala and Zhang, Yan, Holdup by Junior Claimholders: Evidence from the Mortgage Market (October 31, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Charles A. Dice Center Working Paper No. 2014-02, Fisher College of Business Working Paper No. 2014-03-02, Available at SSRN: https://ssrn.com/abstract=2022501 or http://dx.doi.org/10.2139/ssrn.2022501