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The effect of mortgage securitization on asset liquidation decisions

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  • Anurag A Mehrotra
  • Adam D Nowak
  • Patrick S Smith

Abstract

This article examines whether agency conflicts introduced by securitization affect servicers’ asset liquidation decisions. We find securitized loans are 25.4–28.5 percent less likely to be liquidated via short sales than portfolio loans. Securitized loan servicers’ bias against short sales does not represent an agency conflict if short sale and real estate owned (REO) liquidations are equally efficient. However, we find REOs have significantly lower average liquidation prices, higher average liquidation expenses, and longer average liquidation times than short sales. Although short sales benefit investors, securitized loan servicers have a financial incentive to pursue REOs.

Suggested Citation

  • Anurag A Mehrotra & Adam D Nowak & Patrick S Smith, 2025. "The effect of mortgage securitization on asset liquidation decisions," Review of Finance, European Finance Association, vol. 29(5), pages 1369-1395.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:5:p:1369-1395.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaf038
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy

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