Working Paper: NBER ID: w20015
Authors: Sumit Agarwal; Gene Amromin; Itzhak Bendavid; Souphala Chomsisengphet; Yan Zhang
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: mortgage market; junior claimholders; holdup problem; loss mitigation
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| holdup servicers (G21) | delay loss mitigation actions (G33) |
| delay loss mitigation actions (G33) | probability of no action (C69) |
| holdup servicers (G21) | lower probability of outright liquidation (G33) |
| holdup servicers (G21) | higher probability of modifications (C59) |
| current second lien payments (G21) | holdup servicers' behavior (G21) |
| holdup servicers (G21) | improved performance of first-lien loans without intervention (G21) |