Valuation of Mortgage Servicing Rights with Foreclosure Delay and Forbearance Allowed |
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| Authors: | Che-Chun Lin Ting-Heng Chu Larry J Prather |
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| Institution: | (1) Department of Quantitative Finance, National Tsing Hua University, Hsin Chu, Taiwan, 30013;(2) Department of Economics, Finance, and Urban Studies, East Tennessee State University, Box 70686 Johnson City, TN, 37614 |
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| Abstract: | We develop a bivariate binomial model to price Mortgage Servicing Rights (MSRs). Our model is an improvement over previous
MSR pricing models by explicitly incorporating the realistic assumptions that there are additional costs involved in servicing
delinquent loans. In addition to the Hilliard et al. mortgage-pricing tree, we extend additional sub-branches to model the
borrower's decision of prepayment, cure, and foreclosure after a loan becomes delinquent. We then investigate how the value
of the Mortgage Servicing Right varies with interest rate volatility, house price volatility, delinquency options, deficiency
judgments, default penalties, forbearance periods, and speed of adjustments factors.
JEL Classification: C15, G21 |
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| Keywords: | mortgage servicing right prepayment default |
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