Servicer Contracts and the Design of Mortgage‐Backed Security Pools

Robert M. Mooradian and Pegaret Pichler

Real Estate Economics, 2018, vol. 46, issue 3, 698-738

Abstract: We develop a unified model of mortgage and servicer contracts. Renegotiating mortgage contracts following default is strictly Pareto improving, if the lender gathers updated information. An incentive compatible servicer contract requires the servicer to hold a risk position that has a value strictly greater than the cost of exerting effort. This risk position cannot in general be approximated with a horizontal “first‐loss” position. An alternative, forming a nondiversified pool, preserves pool‐wide information, avoids the cost of an incentive compatible servicer contract, and may increase MBS value.

Date: 2018
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https://doi.org/10.1111/1540-6229.12188

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