Holdup by Junior Claimholders: Evidence from the Mortgage Market
Charles A. Dice Center Working Paper No. 2014-02
47 Pages Posted: 15 Mar 2012 Last revised: 24 Aug 2022
Date Written: October 31, 2017
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: Suggested Citation