Financially Constrained Servicers and Aggressive Foreclosures

Abstract

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