Associate Dr. Chen Zheng coauthored an article in Management Science studying incentive problems associated with the compensation of servicers during default remediation.
The authors fill a gap in the literature about this topic by identifying stylized facts about servicing fees and present evidence showing that servicing fees drive mortgage modifications and foreclosures, likely to the detriment of investors. Servicers modify loans paying high servicing fees and delay their foreclosure to protect servicing cash flows. These effects are causal. Voluntary mortgage renegotiation by servicers is unlikely to reduce foreclosures. In addition to ex post government intervention, special servicing and innovative mortgage contracts allowing for affordable modifications that benefit investors may improve renegotiation outcomes.
The full article, “Mortgage Servicing Fees and Servicer Incentives During Loss Mitigation,” is available below and on the Management Science website here.