Financially Constrained Servicers and Aggressive Foreclosures
74 Pages Posted: 6 Nov 2017 Last revised: 8 Dec 2018
Date Written: December 7, 2018
Financially constrained mortgage servicers destroyed substantial MBS investor value during the financial crisis through their management of delinquent mortgages. Servicers are obligated to advance to investors monthly payments missed by borrowers. This paper shows that, to minimize this obligation to extend financing to distressed borrowers, constrained servicers aggressively pursued foreclosures and modifications at the expense of investors, borrowers, and future mortgage performance. IV regressions suggest that servicers' financial constraints caused 440,712 additional foreclosures. On average, servicers' financial constraints were responsible for 20.51% of the total investor value destroyed per defaulted loan-causing aggregate investor value destruction of $84 billion.
JEL Classification: G21
Suggested Citation: Suggested Citation