Servicing Securitisation through Excessive Foreclosure

50 Pages Posted: 21 Sep 2015 Last revised: 15 Aug 2018

See all articles by John Chi-Fong Kuong

John Chi-Fong Kuong

INSEAD - Finance

Jing Zeng

Frankfurt School of Finance and Management gGmbH

Date Written: September 28, 2016

Abstract

How does securitisation distort the foreclosure decision of non-performing mortgages? In a model in which informed securitisers raise liquidity by jointly designing the mortgage-backed security and the foreclosure policy, the authors find that securitisers optimally adopt an excessive foreclosure policy while retaining the junior tranche to signal positive information to investors in the senior tranche. In order to commit to the optimal foreclosure policy, securitisers can either outsource the foreclosure decisions to mortgage servicers who are intrinsically “tough" or offer the servicers “biased" servicing contracts. Policies that aim to restore ex post efficient foreclosures may inadvertently reduce mortgage originators' screening effort.

Keywords: Security Design, Mortgage-backed Securities, Mortgage Foreclosure, Mortgage Servicers, Asymmetric Information, Commitment

JEL Classification: D8, G21, G23, G24

Suggested Citation

Kuong, John Chi-Fong and Zeng, Jing, Servicing Securitisation through Excessive Foreclosure (September 28, 2016). INSEAD Working Paper No. 2016/66/FIN. Available at SSRN: https://ssrn.com/abstract=2662536 or http://dx.doi.org/10.2139/ssrn.2662536

John Chi-Fong Kuong

INSEAD - Finance ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

HOME PAGE: http://www.johncfkuong.com

Jing Zeng (Contact Author)

Frankfurt School of Finance and Management gGmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.zengjing.net

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