Holdup by Junior Claimholders: Evidence from the Mortgage Market

Abstract

and seminar participants at the OCC, FIRS, and AREUEA (Chicago) for helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, the Federal Reserve System, the Federal Reserve Bank of Chicago, or the Office of the Comptroller of the Currency. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

How Multiple Creditors, Market Liquidity and Homeowner Participation Affect Foreclosure Discounts

“…Negative equity is proposed as a main factor in determining the mortgage default risk in itself (Foote, Gerardi, and Willen, 2008;Sumell, 2009;Andrews, Sánchez, and Johansson, 2011), and important in combination with other events such as unemployment (Bhutta, Dokko, and Shan, 2017;Gerardi, Herkenhoff, Ohanian, et al, 2018), although relatively less important than other factors in itself (Linn and Lyons, 2020). We hypothesize that multiple delinquent claims on a property can signal severe overindebtedness, thus contributing to a higher foreclosure discount and a lower rate of soft resolutions to foreclosures and countering the effect of subordinated claims by the claim holders on such claims incentives to support the soft resolution with homeowner participation found by Agarwal, Amromin, Ben-David, et al (2019).…”

“…These data build on previous research by comparing foreclosures with different liquidities to examine the impact of subordinated debt. We hypothesize that such claims can lead to soft foreclosure (Agarwal, Amromin, Ben-David, et al, 2019) and a lower foreclosure discount. However, several subordinated claims also signal a higher probability of over-indebtedness as a result of the reduction of homeowner participation incentives in such a soft foreclosure (see also Gerardi, Herkenhoff, Ohanian, et al (2018)) and also lead to larger losses due to lower investments in maintaining the property (Melzer, 2017).…”