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Mortgage Servicing Fees and Servicer Incentives During Loss Mitigation

Author

Listed:
  • Moussa Diop

    (University of Southern California, Los Angeles, California 90089)

  • Chen Zheng

    (The Brattle Group, San Francisco, California 94105)

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.

Suggested Citation

  • Moussa Diop & Chen Zheng, 2023. "Mortgage Servicing Fees and Servicer Incentives During Loss Mitigation," Management Science, INFORMS, vol. 69(11), pages 7118-7150, November.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:11:p:7118-7150
    DOI: 10.1287/mnsc.2022.4626
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