The Incentives of Mortgage Servicers: Myths and Realities

Abstract

, staff at Neighborworks America, and many market participants from servicers, investors, Freddie Mac, mortgage insurance companies, rating agencies, and legal and tax counsel for helpful discussions and comments. We are also grateful to Erik Hembre and Christina Pinkston for excellent research assistance.

A Loan Modification Approach to the Housing Crisis

“…Indeed, when loan servicers do renegotiate loans, they face the risk of lawsuits from MBS holders who claim that the loan servicer was too generous to the homeowner. MBS holders today may also believe or hope that the government will purchase their MBSs, maybe at par or above-market value, and thus prefer to avoid renegotiations that will lower their value (Larry Cordell et al, 2008). 7 And none of these parties has much interest in ensuring that a borrower's neighbor's house maintains its value rather than being dragged down by a foreclosure.…”

The Cost of Foreclosure Delay

“…These practices were likely driven by incentives at mortgage servicers to keep costs down for loans they did not own (see Cordell et al . ).…”

Second Chances: Subprime Mortgage Modification and Redefault

“…On the other hand, Cordell et al. () argue that a lack of specific guidance from private mortgage‐backed security (MBS) investors has led to a reluctance on the part of their servicers to renegotiate loan terms, even when such changes might benefit investors and borrowers. Piskorski, Seru, and Vig () find that loans that end up in banks’ portfolios ultimately perform better than those held in securities, possibly because of an increased willingness by banks to offer modifications to loans of which they are the sole owners.…”