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Servicer Contracts and the Design of Mortgage‐Backed Security Pools
Author(s) -
Mooradian Robert M.,
Pichler Pegaret
Publication year - 2017
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.12188
Subject(s) - incentive , position (finance) , value (mathematics) , economics , pareto principle , pareto optimal , microeconomics , actuarial science , business , finance , computer science , multi objective optimization , operations management , machine learning
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.