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Article Mtg Servicing Levitin Twomey 2011 Yale Journal Reg

Article Mtg Servicing Levitin Twomey 2011 Yale Journal Reg

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Electronic copy available at: http://ssrn.com/abstract=1324023
Mortgage Servicing 
 Adam J. Levitin
Georgetown University Law Center 
 , AJL53@law.georgetown.edu
Tara Twomey 
 National Consumer Law Center 
Georgetown Public Law and Legal Theory Research Paper No. 11-09Georgetown Business, Economics and Regulatory Law Research Paper No. 11-01This paper can be downloaded free of charge from:http://scholarship.law.georgetown.edu/facpub/498http://ssrn.com/abstract=1324023
This open-access article is brought to you by the Georgetown Law Library. Posted with permission of the author.
 Yale J. on Reg. (forthcoming, 2011)
Electronic copy available at: http://ssrn.com/abstract=1324023
Electronic copy available at: http://ssrn.com/abstract=1324023
Mortgage Servicing
Adam J. Levitin† & Tara Twomey‡
This Article argues that a principal-agent problem plays a critical role inthe current foreclosure crisis.
 A traditional mortgage lender decides whether to foreclose or restructurea 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 asagents for mortgage-backed securities (
) investors.
compensation structures create a principal-agent conflict between them and MBS investors. Servicers have no stake in the performanceof mortgage loans, so they do not share investors
interest in maximizing thenet 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 communitiesand the housing market as a whole.
This Article reviews the economics and regulation of servicing and laysout the principal-agent problem. It explains why the Home Affordable Modification Program (
) has been unable to adequately addressservicer incentive problems and suggests possible solutions, drawing ondevices used in other securitization servicing markets. Correcting the principal-agent problem in mortgage servicing is critical for mitigating thenegative social externalities from uneconomic foreclosures and ensuringgreater protection for investors and homeowners.
† Associate Professor, Georgetown University Law Center.
The views expressed in this Article aresolely those of the authors. This Article incorporate
s parts of Professor Levitin‘s c
ongressionaltestimony on foreclosures and mortgage servicing before the Senate and House Judiciary Committees. Iwould like to thank William Bratton, Larry Cordell, Anna Gelpern, Paul Koches, Sarah Levitin, RobertVan Order, Susan Wachter, and Elizabeth Warren for their comments and encouragement; and to thank Grant MacQueen and Tai Nguyen for their research assistance. Comments?AJL53@law.georgetown.edu. 
Of Counsel, National Consumer Law Center; Amicus Project Director, National Association of Consumer Bankruptcy Attorneys; and former Lecturer in Law at Stanford Law School and Harvard LawSchool. The views expressed in this Article are solely those of the authors. This Article incorporates partof Ms. Twomey
s congressional testimony on foreclosures and mortgage servicing before the HouseFinancial Services Committee Subcommittee on Housing and Community Opportunity. I thank AlysCohen, Katherine Porter, John Rao, and Diane Thompson for their help in building the foundation of this Article. Comments? ttwomey@stanford.edu.
Electronic copy available at: http://ssrn.com/abstract=1324023
Electronic copy available at: http://ssrn.com/abstract=1324023
IntroductionThe home is the most significant asset of many American families,
and awide array of federal and state regulatory schemes work to encourage and
Brian K. Bucks et al.,
Changes in U 
Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
, F
., Feb. 2009, at A1, A33,
available at 

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