Mortgage Servicing Fees and Servicer Incentives During Loss Mitigation

Moussa Diop () and Chen Zheng ()
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Moussa Diop: University of Southern California, Los Angeles, California 90089
Chen Zheng: The Brattle Group, San Francisco, California 94105

Management Science, 2023, vol. 69, issue 11, 7118-7150

Abstract: We study incentive problems associated with the compensation of servicers during default remediation. First, we fill a gap in the literature by identifying stylized facts about servicing fees. Next, we present evidence showing that servicing fees drive mortgage modifications and foreclosures, likely to the detriment of investors. Servicers modify loans paying high servicing fees and delay their foreclosure to protect servicing cash flows. These effects are causal. Voluntary mortgage renegotiation by servicers is unlikely to reduce foreclosures. In addition to ex post government intervention, special servicing and innovative mortgage contracts allowing for affordable modifications that benefit investors may improve renegotiation outcomes.

Keywords: real estate; securitization; mortgage servicing; servicer incentives; mortgage modification; foreclosure (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:11:p:7118-7150

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