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Mortgage Servicing

91 Pages Posted: 18 Dec 2010 Last revised: 20 Jan 2011

Adam J. Levitin

Georgetown University Law Center

Tara Twomey

National Consumer Law Center; National Consumer Bankruptcy Rights Center

Date Written: December 15, 2010

Abstract

This Article argues that a principal-agent problem plays a critical role in the current foreclosure crisis.

A traditional mortgage lender decides whether to foreclose or restructure a defaulted loan based on its evaluation of the comparative net present value of those options. Most residential mortgage loans, however, are securitized. Securitized mortgage loans are managed by third-party mortgage servicers as agents for mortgage-backed securities (“MBS”) investors.

Servicers’ compensation structures create a principal-agent conflict between them and MBS investors. Servicers have no stake in the performance of mortgage loans, so they do not share investors’ interest in maximizing the net present value of the loan. Instead, servicers’ decision of whether to foreclose or modify a loan is based on their own cost and income structure, which is skewed toward foreclosure. The costs of this principal-agent conflict are thus externalized directly on homeowners and indirectly on communities and the housing market as a whole.

This Article reviews the economics and regulation of servicing and lays out the principal-agent problem. It explains why the Home Affordable Modification Program (“HAMP”) has been unable to adequately address servicer incentive problems and suggests possible solutions, drawing on devices used in other securitization servicing markets. Correcting the principal-agent problem in mortgage servicing is critical for mitigating the negative social externalities from uneconomic foreclosures and ensuring greater protection for investors and homeowners.

Keywords: Mortgage, Servicing, MBS, RMBS, CMBS, Servicer, Foreclosure, Loss Mitigation

Suggested Citation

Levitin, Adam J. and Twomey, Tara, Mortgage Servicing (December 15, 2010). Yale Journal on Regulation, Vol. 28, No. 1, 2011; Georgetown Public Law Research Paper No. 11-09; Georgetown Law and Economics Research Paper No. 11-01. Available at SSRN: https://ssrn.com/abstract=1324023

Adam J. Levitin (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Tara Twomey

National Consumer Bankruptcy Rights Center ( email )

1501 The Alameda
San Jose, CA 95126
United States

National Consumer Law Center ( email )

7 Winthrop Square
Boston, MA 02110
United States

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