2011 MORTGAGE SERVICING by Adam Levitin and Tara Twomey

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2011 MORTGAGE SERVICING by Adam Levitin and Tara Twomey

2011 MORTGAGE SERVICING by Adam Levitin and Tara Twomey

2011

Mortgage Servicing

Adam J. Levitin
Georgetown University Law Center

Tara Twomey
National Consumer Law Center

This Article argues that a principal-agent problem plays a critical role in the current foreclosure crisis.

A traditional mortgage lender decides whether to foreclose or restructure a defaulted loan based on its evaluation of the comparative net present value of those options. Most residential mortgage loans, however, are securitized.

Securitized mortgage loans are managed by third-party mortgage servicers as agents for mortgage-backed securities (“MBS”) investors.

Servicers‘ compensation structures create a principal-agent conflict between them and MBS investors. Servicers have no stake in the performance of mortgage loans, so they do not share investors‘ interest in maximizing the net present value of the loan. Instead, servicers‘ decision of whether to foreclose or modify a loan is based on their own cost and income structure, which is skewed toward foreclosure. The costs of this principal-agent conflict are thus externalized directly on homeowners and indirectly on communities and the housing market as a whole.

This Article reviews the economics and regulation of servicing and lays out the principal-agent problem. It explains why the Home Affordable Modification Program (“HAMP”) has been unable to adequately address servicer incentive problems and suggests possible solutions, drawing on devices used in other securitization servicing markets. Correcting the principal-agent problem in mortgage servicing is critical for mitigating the negative social externalities from uneconomic foreclosures and ensuring greater protection for investors and homeowners.

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3 Responses to “2011 MORTGAGE SERVICING by Adam Levitin and Tara Twomey”

  1. Healthyhead2toe says:

    So, the servicer’s are to blame for all that is evil and dark in the fore closer crisis! OH, PLEASE GIVE US ALL A BREAK.
    I can not believe that the bankers had no idea that these problems where happening.
    I also can not believe that the White house had no clue that the programs would not reach the homeowners in need because of the servicer’s. OH FREAKIN’ PLEASE!

  2. justtiredoftheinjustice says:

    This is really working my nerves!……everyone knew what was going on…the Judges, lawyers, etc. everyone made money from this but the homeowners!!!!!!…..the applications to file answers are so expensive that the average homeowner can’t afford to fight..unless they file indigent and hope the judge allows it…….the lawyers breach the professional code of conduct……..yet

  3. justtiredoftheinjustice says:

    THE ATTORNEY’S BREACH THE CODE OF CONDUCT….AND KEEP THEIR LICENSE TO PRACTICE LAW!!!!…NO ONE IS IN JAIL!!!!!! AND THIS IS THE AMERICAN JUSTICE SYSTEM!!!! MORE LIKE JOKE SYSTEM!!!UGH!

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