Holdup by Junior Claimholders: Evidence from the Mortgage Market

47 Pages Posted: 15 Mar 2012 Last revised: 2 Nov 2017

Sumit Agarwal

National University of Singapore

Gene Amromin

Federal Reserve Bank of Chicago

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Yan Zhang

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Multiple version iconThere are 2 versions of this paper

Date Written: October 31, 2017

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.

Keywords: Subprime Crisis, Household Finance, Second Liens, Mortgages, Holdup Problem

JEL Classification: G21,G33, H31

Suggested Citation

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

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Gene Amromin

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Yan Zhang

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th St. SW
Washington, DC 20219
United States
202-6495492 (Phone)

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