Asymmetric Information in Loan Renegotiation : The Importance of Originator-Servicer Affiliation

We present evidence that affiliation between the debt renegotiator and the originator represents a mechanism to reduce asymmetric information inherent in debt renegotiation. We hypothesize that affiliation affords servicers lower-cost access to borrower information, thus improving their ability to implement efficient debt restructuring. Consistent with this hypothesis, affiliation affects the likelihood, form, and effectiveness of modifications in a large sample of delinquent securitized mortgages. In a significant departure from the recent literature, we show that the additional information available through affiliation is "hard" in nature. As banks disintegrate origination and servicing, information critical for debt renegotiation will be lost