Servicer Contracts and the Design of Mortgage-Backed Security Pools

Mooradian, Robert M.; Pichler, Pegaret

doi:10.2139/ssrn.1914860

Servicer Contracts and the Design of Mortgage-Backed Security Pools

Northeastern U. D’Amore-McKim School of Business Research Paper No. 2013-12

49 Pages Posted: 24 Aug 2011 Last revised: 9 Sep 2016

See all articles by Robert M. Mooradian

Robert M. Mooradian

Northeastern University, D’Amore-McKim School of Business, Finance Area

Pegaret Pichler

Northeastern University, D’Amore-McKim School of Business, Finance Area

There are 2 versions of this paper

Date Written: August 3, 2016

Abstract

We develop a unified model of mortgage and servicer contracts. Renegotiating mortgage contracts following default is strictly Pareto improving, if the lender gathers updated information. An incentive compatible servicer contract requires the servicer to hold a risk position that has a value strictly greater than the cost of exerting effort. This risk position cannot in general be approximated with a horizontal "first-loss" position. If servicers do not sufficiently value investment in MBSs, forming a nondiversified pool to preserve pool-wide information may increase MBS value.

Keywords: Servicer contracts, mortgage default, renegotiation

JEL Classification: G21, D86

Suggested Citation: Suggested Citation

Mooradian, Robert M. and Pichler, Pegaret, Servicer Contracts and the Design of Mortgage-Backed Security Pools (August 3, 2016). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2013-12, Available at SSRN: https://ssrn.com/abstract=1914860 or http://dx.doi.org/10.2139/ssrn.1914860