IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2008-46.html
   My bibliography  Save this paper

The incentives of mortgage servicers: myths and realities

Author

Listed:
  • Lawrence R. Cordell
  • Karen E. Dynan
  • Andreas Lehnert
  • J. Nellie Liang
  • Eileen Mauskopf

Abstract

As foreclosure initiations have soared over the past couple of years, many have questioned whether mortgage servicers have the right incentives to work out troubled subprime mortgages so that borrowers can avoid foreclosure and remain in their homes. Some critics claim that because servicers, unlike investors, do not bear the losses associated with foreclosure, they have little incentive to modify troubled loans by reducing interest rates or principal, or by extending the term. Our analysis suggests that while servicers have substantially improved borrower outreach and increased loss mitigation efforts, some foreclosures still occur where both borrower and investor would benefit if such an outcome were avoided. We discuss servicers’ incentives and the obstacles to working out delinquent mortgages. We find that loss mitigation is costly for servicers, in large part because servicers currently lack adequate staff and technology; unfortunately, servicers have few financial incentives to expand capacity. Two additional factors appear to be damping workouts of nonprime loans, the group that has seen the largest increase in delinquencies. First, affordable solutions are more difficult to achieve for borrowers with these loans than for those with prime mortgages. Second, these loans are generally funded by private-label mortgage backed securities, for which investors provide little or no guidance to servicers about what modifications are appropriate. More generally, investors are wary that modifications might turn out to be unsuccessful, thus delaying and increasing ultimate losses. Given the significant deadweight losses incorporated in recent quarters’ loss rates of 50 percent or more, we present options for further improving servicer performance. We discuss supporting further industry efforts to expand borrower outreach and establish servicing guidelines, educating investors, paying servicers fees for appropriate loan workouts, and improving measures of servicer performance.

Suggested Citation

  • Lawrence R. Cordell & Karen E. Dynan & Andreas Lehnert & J. Nellie Liang & Eileen Mauskopf, 2008. "The incentives of mortgage servicers: myths and realities," Finance and Economics Discussion Series 2008-46, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2008-46
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/feds/2008/200846/200846abs.html
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/feds/2008/200846/200846pap.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fleitas, Sebastian & Fishback, Price & Snowden, Kenneth, 2016. "Economic Crisis and the Demise of a Popular Contractual Form: Building and Loan Mortgage Contracts in the 1930s," CAGE Online Working Paper Series 275, Competitive Advantage in the Global Economy (CAGE).
    2. Zhang, Yan, 2013. "Does loan renegotiation differ by securitization status? A transition probability study," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 513-527.
    3. Christopher Mayer & Karen Pence & Shane M. Sherlund, 2009. "The Rise in Mortgage Defaults," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 27-50, Winter.
    4. Christopher Foote & Kristopher Gerardi & Lorenz Goette & Paul Willen, 2010. "Reducing Foreclosures: No Easy Answers," NBER Chapters,in: NBER Macroeconomics Annual 2009, Volume 24, pages 89-138 National Bureau of Economic Research, Inc.
    5. Steve Holden & Austin Kelly & Douglas McManus & Therese Scharlemann & Ryan Singer & John D. Worth, 2012. "The HAMP NPV Model: Development and Early Performance," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 40, pages 32-64, December.
    6. Adelino, Manuel & Gerardi, Kristopher & Willen, Paul S., 2013. "Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 835-853.
    7. Hancock Diana & Passmore Wayne, 2009. "Three Initiatives Enhancing the Mortgage Market and Promoting Financial Stability," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(3), pages 1-25, March.
    8. Goodman, Allen C. & Smith, Brent C., 2010. "Residential mortgage default: Theory works and so does policy," Journal of Housing Economics, Elsevier, vol. 19(4), pages 280-294, December.
    9. Piskorski, Tomasz & Seru, Amit & Vig, Vikrant, 2010. "Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 369-397, September.
    10. Phillip Swagel, 2009. "The Financial Crisis: An Inside View," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 1-78.
    11. Been, Vicki & Weselcouch, Mary & Voicu, Ioan & Murff, Scott, 2013. "Determinants of the incidence of U.S. Mortgage Loan Modifications," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3951-3973.
    12. Wenli Li & Michelle J. White, 2009. "Mortgage Default, Foreclosure, and Bankruptcy," NBER Working Papers 15472, National Bureau of Economic Research, Inc.
    13. Michelle J. White, 2008. "Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis," NBER Working Papers 14549, National Bureau of Economic Research, Inc.
    14. Evridiki Tsounta, 2011. "Home Sweet Home; Government's Role in Reaching the American Dream," IMF Working Papers 11/191, International Monetary Fund.

    More about this item

    Keywords

    Mortgage loans ; Subprime mortgage;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2008-46. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio). General contact details of provider: http://edirc.repec.org/data/frbgvus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.