Panel Paper: Downstream Integration and Upstream Agency Problems: Evidence From the Mortgage Foreclosure Industry

Friday, November 9, 2012 : 8:40 AM
Baltimore Theatre (Radisson Plaza Lord Baltimore Hotel)

*Names in bold indicate Presenter

Lauren Lambie-Hanson, Federal Reserve Bank of Boston and Timothy Lambie-Hanson, Suffolk University

In many states, a mortgage foreclosure is carried out through the sale of the underlying property at a public auction conducted by a private auctioneer hired by the lender's attorney. Increasingly, foreclosure attorneys are using in-house auctioneers rather than independent auction companies to complete these sales in order to generate additional profits. By doing so, however, a law firm creates incentives that conflict with the interests of the lender, since the law firm benefits financially if the property is sold at foreclosure auction and if the auction is conducted cheaply. We will empirically test whether this conflict of interest results in differences in outcomes for foreclosures initiated by law firms utilizing in-house auctioneers. Specifically, we will examine whether the proportion of initiated foreclosures that are completed, the duration of the foreclosure process, the frequency of processing errors, and the sale price at auction differ by the organizational form of the law firm. To do so, we will utilize a rich dataset of all 105,000 foreclosures initiated in Massachusetts from 2007 through 2011, supplemented by loan-level mortgage performance data that will allow us to identify the mortgage servicer for a sample of loans. 

This issue is relevant to many actors in the foreclosure industry. Most immediately, the mortgage holder wants the process to result in an outcome that minimizes its losses, which also includes avoiding potential legal ramifications from improperly completing foreclosures. Some mortgage holders clearly consider this conflict of interest problematic. For example, Freddie Mac does not allow delinquent loans that it owns to be processed by a law firm utilizing an in-house auctioneer. Our findings will also have important implications for the welfare of borrowers seeking to prevent foreclosure. Moreover, in most states underwater borrowers who cannot avoid foreclosure are liable for the deficiency between the amount they owe and the amount recouped by the foreclosure sale and, in all states, borrowers receive the surplus if the amount owed is less than the sale price received at auction. We also anticipate that other actors in the foreclosure industry, such as auction companies, law firms, and policymakers, will also be interested in our results.