Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-09T07:54:26.538Z Has data issue: false hasContentIssue false
  • English
  • Français

Holdup by Junior Claimholders: Evidence from the Mortgage Market

Published online by Cambridge University Press:  31 August 2018

Sumit Agarwal ,
Gene Amromin ,
Itzhak Ben-David ,
Souphala Chomsisengphet  and
Yan Zhang
Get access Rights & Permissions [Opens in a new window]

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 1 , February 2019 , pp. 247 - 274
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

The authors thank Fredrik Andersson, Gadi Barlevy, Ted Durant, Ronel Elul (the referee), Karen Furst, Dennis Glennon, Bruce Krueger, Mark Levonian, Paul Malatesta (the editor), Amit Seru, and seminar participants at the OCC, Financial Intermediation Research Society (FIRS), and American Real Estate and Urban Economics Association (AREUEA) (Chicago) for helpful comments and suggestions. The views in this article are those of the authors and may not reflect those of the Federal Reserve System, the Federal Reserve Bank of Chicago, or the Office of the Comptroller of the Currency.

References

Agarwal, S.; Amromin, G.; Ben-David, I.; Chomsisengphet, S.; and Evanoff, D. D.. “The Role of Securitization in Mortgage Renegotiation.” Journal of Financial Economics, 102 (2011), 559–578.Google Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; Chomsisengphet, S.; and Evanoff, D. D.. “The Effectiveness of Mandatory Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky Mortgages?” Working Paper, the Ohio State University (2013).Google Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; Chomsisengphet, S.; and Evanoff, D. D.. “Predatory Lending and the Subprime Crisis.” Journal of Financial Economics, 113 (2014), 29–52.Google Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; Chomsisengphet, S.; and Evanoff, D. D.. “Mitigating Investor Losses Due to Mortgage Defaults: Lessons from the Global Financial Crisis.” In Capital Markets Union and Beyond, Allen, F., Faia, E., Haliassos, M., and Langenbucher, K., eds. Cambridge, MA: MIT Press, forthcoming (2019).Google Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; Chomsisengphet, S.; Piskorski, T.; and Seru, A.. “Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program.” Journal of Political Economy, 125 (2017), 654–712.Google Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; and Dinc, S.. “The Politics of Foreclosures.” Journal of Finance, forthcoming (2018).Google Scholar
Agarwal, S.; Amromin, G.; Ben-David, I.; and Evanoff, D. D.. “Loan Steering in Mortgage Markets.” Working Paper, the Ohio State University (2015).Google Scholar
Agarwal, S.; Ben-David, I.; and Yao, V.. “Systematic Mistakes of Borrowers in the Mortgage Market and Lack of Financial Sophistication.” Journal of Financial Economics, 123 (2017), 42–58.Google Scholar
Agarwal, S.; Chang, Y.; and Yavas, A.. “Securitization and Adverse Selection in Mortgage Lending.” Journal of Financial Economics, 105 (2011c), 640–660.Google Scholar
Armour, J., and Skeel, D.. “Who Writes the Rules for Hostile Takeovers, and Why? The Particular Divergence of U.S. and U.K. Takeover Regulation.” Georgetown Law Journal, 95 (2007), 1727–1794.Google Scholar
Been, V.; Jackson, H.; and Willis, M.. “Sticky Seconds—The Problems Second Liens Pose to the Resolution of Distressed Mortgages.” NYU Journal of Law and Business, 9 (2012), 71–123.Google Scholar
Ben-David, I.“Financial Constraints and Inflated Home Prices during the Real-Estate Boom.” American Economic Journal: Applied Economics, 3 (2011), 55–78.Google Scholar
Bolton, P., and Scharfstein, D. S.. “Optimal Debt Structure and the Number of Creditors.” Journal of Political Economy, 104 (1996), 1–25.Google Scholar
Bond, P.; Elul, R.; Garyn-Tal, S.; and Musto, D.. “Does Junior Inherit? Refinancing and the Blocking Power of Second Mortgages.” Review of Financial Studies, 30 (2017), 211–244.Google Scholar
Campbell, J. Y.; Giglio, S.; and Pathak, P.. “Forced Sales and House Prices.” American Economic Review, 101 (2011), 2108–2131.Google Scholar
Cordell, L.; Dynan, K.; Lehnert, A.; Liang, N.; and Mauskopf, E.. “The Incentives of Mortgage Servicers and Designing Loan Modifications to Address the Mortgage Crisis.” In Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future, Kolb, R. W., ed. Hoboken, NJ: John Wiley & Sons (2011).Google Scholar
Elul, R.“Adverse Selection in Mortgage Markets.” Working Paper, Federal Reserve Bank of Philadelphia (2011).Google Scholar
Engel, K., and McCoy, P.. The Subprime Virus: Reckless Credit, Regulatory Failure, and Next Steps. Oxford, UK: Oxford University Press (2011).Google Scholar
Ghent, A. C., and Kudlyak, M.. “Recourse and Residential Mortgage Default: Evidence from US States.” Review of Financial Studies, 24 (2011), 3139–3186.Google Scholar
Goodman, L. S.“National Mortgage Servicing Standards and Conflicts of Interest.” Testimony to the Subcommittee on Housing, Transportation and Community Development of the Senate Committee on Banking, Housing, and Urban Affairs, available at https://www.banking.senate.gov/imo/media/doc/GoodmanTestimony51211pm.pdf (2011a).Google Scholar
Goodman, L. S.“Examining Lien-Position Conflicts.” Available at https://mortgageorb.com/examining-lien-position-conflicts (2011b).Google Scholar
Goodman, L. S.; Ashworth, R.; Landy, B.; and Yang, L.. “Strategic Default and 1st/2nd Lien Payment Priority.” Industry Report, Amherst Mortgage Insight (2011).Google Scholar
Goodman, L. S.; Ashworth, R.; Landy, B.; and Yin, K.. “Second Liens: How Important?” Journal of Fixed Income, 20 (2010), 19–30.Google Scholar
Ivashina, V.; Iverson, B.; and Smith, D. C.. “The Ownership and Trading of Debt Claims in Chapter 11 Restructurings.” Journal of Financial Economics, 119 (2016), 316–335.Google Scholar
Keys, B.; Mukherjee, T.; Seru, A.; and Vig, V.. “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans.” Quarterly Journal of Economics, 125 (2010), 307–362.Google Scholar
Kominers, S. D., and Weyl, E. G.. “Concordance among Holdouts.” Working Paper, University of Chicago (2011).Google Scholar
Lee, D.; Mayer, C.; and Tracy, J.. “A New Look at Second Liens.” Working Paper, Federal Reserve Bank of New York and Columbia University (2012).Google Scholar
Mailath, G. J., and Postelwaite, A.. “Asymmetric Information Bargaining Problems with Many Agents.” Review of Economic Studies, 57 (1990), 351–367.Google Scholar
Mayer, C.; Morrison, E.; and Piskorski, T.. “Essay: A New Proposal for Loan Modifications.” Yale Journal on Regulation, 26 (2009a), 417–429.Google Scholar
Mayer, C.; Pence, K.; and Sherlund, S. M.. “The Rise in Mortgage Defaults.” Journal of Economic Perspectives, 23 (2009b), 27–50.Google Scholar
McCoy, P. A.“Barriers to Foreclosure Prevention during the Financial Crisis.” Arizona Law Review, 55 (2012), 723–773.Google Scholar
Mian, A., and Sufi, A.. “The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis.” Quarterly Journal of Economics, 124 (2009), 1449–1496.Google Scholar
Pinedo, A. T., and Baumgardner, A. M.. “Federal Mortgage Modification and Foreclosure Prevention Efforts.” Uniform Commercial Code Law Journal, 41 (2009), 319–345.Google Scholar
Piskorski, T.; Seru, A.; and Vig, V.. “Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis.” Journal of Financial Economics, 97 (2010), 369–397.Google Scholar
Posner, R. A.“Foreword: A Political Court.” Harvard Law Review, 119 (2005), 31–102.Google Scholar
Warner, J. B.“Bankruptcy, Absolute Priority, and the Pricing of Risky Claims.” Journal of Financial Economics, 4 (1977), 239–276.Google Scholar
White, M. J.“Bankruptcy Costs and the New Bankruptcy Code.” Journal of Finance, 38 (1983), 477–488.Google Scholar
Zhang, Y.“Does Loan Renegotiation Differ by Securitization Status? A Transition Probability Study.” Journal of Financial Intermediation, 22 (2013), 513–527.Google Scholar
Supplementary material: File

Agarwal et al. supplementary material

Agarwal et al. supplementary material 1

Download Agarwal et al. supplementary material(File)
File 229.4 KB