Working Paper: NBER ID: w17065
Authors: Christopher J. Mayer; Edward Morrison; Tomasz Piskorski; Arpit Gupta
Abstract: We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased thirteen percent per month immediately after the program's announcement. The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.
Keywords: mortgage modification; strategic behavior; foreclosure prevention; subprime mortgages
JEL Codes: D10; G21; G33; K0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Countrywide settlement announcement (G51) | increase in delinquency rate (K35) |
| increase in delinquency rate (K35) | strategic defaults (G33) |
| substantial liquidity through credit cards and low loan-to-value ratios (G21) | increase in delinquency rate (K35) |
| modification program design (C88) | strategic defaults (G33) |
| no significant increase in default rates concerning non-targeted debts (G33) | strategic defaults (G33) |