I have seen some discussions about how differing interests of differing tranches could potentially lead to some pathological results, but here's a real example : Carrington Investment Partners LP vs. American Home Mortgage Servicing.
Carrington bought some junior tranches that apparently have the right to control disposal of REOs in the pool (there are legal fights now over whether they do). As long as the REOs aren't sold, the junior tranche gets its scheduled payment. Once the REO is sold, the proceeds are dived starting from the seniormost tranche, which in this case will leave Carrington's tranches in the cold.
So Carrington is trying to force the servicer to keep the REOs, unsold, presumably until they rot into uselessness. Sure that screws over the senior tranches, nearby homeowners, and the economy as a whole, but hey! a hedge fund has to make a buck! Go free market!
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I wonder how common it was to sell the rights to control with subordinate debt. That would be one explanation for why foreclosures are not being priced to move (my preferred explanation was incompetence).
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