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Servicer Contracts and the Design of Mortgage‐Backed Security Pools

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  • Robert M. Mooradian
  • Pegaret Pichler

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. An alternative, forming a nondiversified pool, preserves pool‐wide information, avoids the cost of an incentive compatible servicer contract, and may increase MBS value.

Suggested Citation

  • Robert M. Mooradian & Pegaret Pichler, 2018. "Servicer Contracts and the Design of Mortgage‐Backed Security Pools," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 46(3), pages 698-738, September.
    • Handle: RePEc:bla:reesec:v:46:y:2018:i:3:p:698-738
    DOI: 10.1111/1540-6229.12188
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    Cited by:

    1. Walter D'Lima & Luis Arturo Lopez, 2021. "Trustee affiliation and servicer oversight: Evidence from CMBS markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(3), pages 699-732, September.

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