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Financially constrained mortgage servicers

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Abstract Financially constrained mortgage servicers destroyed substantial MBS investor value during the financial crisis through their management of delinquent mortgages. Servicers advance to investors monthly payments missed by borrowers. In… Click to show full abstract

Abstract Financially constrained mortgage servicers destroyed substantial MBS investor value during the financial crisis through their management of delinquent mortgages. Servicers advance to investors monthly payments missed by borrowers. In order 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. When agency frictions between the servicer and the investor are higher, the servicer’s financial constraints matter more. IV regressions suggest that, on average per defaulted loan, servicers’ financial constraints are responsible for 20% of the total investor value reduction during the financial crisis.

Keywords: financially constrained; mortgage; constrained mortgage; investor; mortgage servicers

Journal Title: Journal of Financial Economics
Year Published: 2021

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