Working Paper: NBER ID: w15159
Authors: Manuel Adelino; Kristopher Gerardi; Paul S. Willen
Abstract: We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors.
Keywords: mortgage renegotiation; foreclosure crisis; securitization; self-cure risk; redefault risk
JEL Codes: D11; D12; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| redefault risk (G33) | lenders' expectations about the outcomes of renegotiation (D84) |
| self-cure risk (I12) | lenders' expectations about the outcomes of renegotiation (D84) |
| expected house price depreciation (R31) | lenders' expectations about the outcomes of renegotiation (D84) |
| higher self-cure rates (I12) | attractiveness of renegotiation to investors (G11) |
| higher redefault rates (G32) | attractiveness of renegotiation to investors (G11) |
| declining house prices (R31) | attractiveness of renegotiation to investors (G11) |
| lenders' expectations about recovery from foreclosure (G21) | lenders' expectations about the attractiveness of modifications (G21) |
| low overall frequency of renegotiation (L14) | lenders' perception of modifications (G21) |
| seriously delinquent borrowers self-cure (G51) | lenders' expectations about modifications (G21) |
| risk of redefault (G33) | lenders' perception of modifications (G21) |
| contract frictions reduction (L14) | rate of renegotiation (C78) |