Valuation of Mortgage Servicing Rights with Foreclosure Delay and Forbearance Allowed

Che-Chun Lin, Ting-Heng Chu () and Larry Prather ()

Review of Quantitative Finance and Accounting, 2006, vol. 26, issue 1, 54 pages

Abstract: We develop a bivariate binomial model to price Mortgage Servicing Rights (MSRs). Our model is an improvement over previous MSR pricing models by explicitly incorporating the realistic assumptions that there are additional costs involved in servicing delinquent loans. In addition to the Hilliard et al. mortgage-pricing tree, we extend additional sub-branches to model the borrower's decision of prepayment, cure, and foreclosure after a loan becomes delinquent. We then investigate how the value of the Mortgage Servicing Right varies with interest rate volatility, house price volatility, delinquency options, deficiency judgments, default penalties, forbearance periods, and speed of adjustments factors. Copyright Springer Science + Business Media, Inc. 2006

Keywords: mortgage servicing right; prepayment; default (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1007/s11156-006-7032-3

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