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Investors Underestimating Severity of Housing Problem

ervicers‘ compensation structures encourage them to stretch out defaults, but not too long. In other words, servicers want to keep borrowers in a default ―sweatbox to collect late fees and other junk fees, but only until the profit maximizing point. This may explain why servicers often do not vigorously pursue foreclosure at first, but instead allow foreclosure filings to lapse or defaults to linger for a year or more. After hitting the profit-maximizing point on the cumulative net income curve (or more precisely, just before hitting it), the profit-maximizing servicer should want to foreclose and sell the property as quickly as possible before its cumulative income is eaten away by the rising cost of making servicing advances. Servicers are therefore incentivized to engage in quick foreclosure sales and REO sales, even at low prices, because they are indifferent to the amount of the sale proceeds due to the seniority of their claim while they are sensitive to the speed of the sale.

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