Servicer Contracts and the Design of Mortgage‐Backed Security Pools

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.

Trustee affiliation and servicer oversight: Evidence from CMBS markets

“…Next, the sponsoring firm contracts with financial intermediaries including a master servicer and trustee to manage the underlying loans in exchange for monthly fees proportional to the balance of the underlying collateral pool. The servicing contracts are designed with the expectation that the financial intermediaries behave in the best interest of the investors (e.g., Mooradian & Pichler, 2018).…”

“…Furthermore, a decision on limiting advances must have supporting documentation such as an appraisal of the underlying collateral. Although gathering information about the underlying collateral may benefit investors with related CMBS holdings, the master servicer may face little incentives to exert the necessary effort to do so (Mooradian & Pichler, 2018).…”

Delinquencies, Default and Borrowers' Strategic Behavior toward the Modification of Commercial Mortgages

“…2002, Harding and Sirmans 2002, Ambrose and Sanders 2003), yield‐curve slope (Ambrose and Sanders 2003, Seslen and Wheaton 2010), interest rate and equity market volatility (Ambrose and Sanders 2003, Seslen and Wheaton 2010), local market conditions (Deng, Quigley and Sanders 2004, Chen and Deng 2013), originator type (Titman and Tsyplakov 2010, Black et al . 2012) and finally, special servicers (Gan and Mayer 2007, Liu and Quan 2013, Mooradian and Pichler 2017).…”

Commercial Mortgage‐Backed Security Pricing with Real Estate Liquidity Risk

“…An and Pivo (2017) show that default risk is lower for green building commercial mortgage loans. Mooradian and Pichler (2016) develop a model of mortgage and service contracts and show that forming a nondiversified pool preserves pool‐wide information, avoids the cost of an incentive compatible servicer contract, and may increase mortgage‐backed security value. Another strand of research investigates the issues related to the pricing, default risk, or subordination of CMBS (see Esaki (2002), Titman and Tsyplakov (2010), Stanton and Wallace (2018), and Buschbom, Kau, Keenan and Lyubimov (2018)).…”