Servicing Securitisation through Excessive Foreclosure
50 Pages Posted: 21 Sep 2015 Last revised: 15 Aug 2018
Date Written: September 28, 2016
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: Suggested Citation