Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-14T08:21:06.117Z Has data issue: false hasContentIssue false
  • English
  • Français

HOW LOAN MODIFICATIONS INFLUENCE THE PREVALENCE OF MORTGAGE DEFAULTS

Published online by Cambridge University Press:  20 June 2016

Jiseob Kim
Jiseob Kim*
Affiliation:
Korea Development Institute (KDI)
*
Address correspondence to: Jiseob Kim, Korea Development Institute (KDI), 15 Giljae-gil, Sejong-si 339-007, Korea; e-mail: jiseob83@gmail.com
Get access Rights & Permissions [Opens in a new window]

Abstract

How much can government-driven mortgage modification programs reduce the mortgage default rate? I compare an economy without a modification option to one with easy modifications, and evaluate the impact of these loan modifications on the foreclosure rate. Through loan modification, mortgage servicers can mitigate their losses and households can improve their financial positions without having to walk away from their homes. When modifying loan contracts is prohibitively costly, the default rate increases 1.5 percentage points in response to a 2007-style unexpected drop in housing prices of 30%. I calibrate the cost of modification after the financial crisis to match the Home Affordable Modification Program (HAMP) modification rate of 0.68%. My quantitative exercises show that current government efforts to promote mortgage modifications reduce the mortgage default rate by 0.63 percentage points.

Keywords

Mortgage DefaultMortgage ModificationHome Affordable Modification Program (HAMP)Financial Crisis
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 1 , January 2017 , pp. 55 - 105
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adelino, Manuel, Gerardi, Kristopher, and Willen, Paul S. (2013) Why don't lenders renegotiate more home mortgages? Redefaults, self-cures and securitization. Journal of Monetary Economics 60 (7), 835–853.CrossRefGoogle Scholar
Agarwal, Sumit, Amromin, Gene, Ben-David, Itzhak, Chomsisengphet, Souphala, and Evanoff, Douglas D. (2011) The role of securitization in mortgage renegotiation. Journal of Financial Economics 102 (3), 559–578.CrossRefGoogle Scholar
Arslan, Yavuz, Guler, Bulent, and Taskin, Temel (2015) Joint dynamics of house prices and foreclosures. Journal of Money, Credit and Banking 47 (S1), 133–169.Google Scholar
Bhutta, Neil, Dokko, Jane, and Shan, Hui (2010) The Depth of Negative Equity and Mortgage Default Decisions. Finance and economics discussion series, 2010-35, Board of Governors of the Federal Reserve System.CrossRefGoogle Scholar
Burnside, Craig, Eichenbaum, Martin, and Rebelo, Sergio (2015) Understanding Booms and Busts in Housing Markets. Working paper, Kellogg School of Management.Google Scholar
Campbell, John Y. and Cocco, João F. (2015) A model of mortgage default. Journal of Finance 70 (4), 1495–1554.Google Scholar
Chatterjee, Satyajit, Corbae, Dean, Nakajima, Makoto, and Rios-Rull, Jose-Victor (2007) A quantitative theory of unsecured consumer credit with risk of default. Econometrica 75 (6), 1525–1589.CrossRefGoogle Scholar
Chatterjee, Satyajit, Corbae, Dean, and Rios-Rull, Jose-Victor (2011) A Theory of Credit Scoring and Competitive Pricing of Default Risk. Working paper, Federal Reserve Bank of Philadelphia.Google Scholar
Chatterjee, Satyajit and Eyigungor, Burcu (2009) Foreclosures and House Price Dynamics: A Quantitative Analysis of the Mortgage Crisis and the Foreclosure Prevention Policy. Working paper 09-22, Federal Reserve Bank of Philadelphia.CrossRefGoogle Scholar
Chatterjee, Satyajit and Eyigungor, Burcu (2015) A quantitative analysis of the US housing and mortgage markets and the foreclosure crisis. Review of Economic Dynamics 18 (2), 165–184.Google Scholar
Corbae, Dean and Quintin, Erwan (2015) Leverage and the foreclosure crisis. Journal of Political Economy 123 (1), 1–65.CrossRefGoogle Scholar
Davis, Morris A. and Van Nieuwerburgh, Stijn (in press) Housing, finance, and the macroeconomy. In Duranton, Giles, Henderson, J. Vernon, and Strange, William C. (eds.), Handbook of Regional and Urban Economics, pp. 753–811. Oxford, UK: Elsevier B. V.Google Scholar
Demyanyk, Yuliya and Van Hemert, Otto (2011) Understanding the subprime mortgage crisis. Review of Financial Studies 24 (6), 1848–1880.CrossRefGoogle Scholar
D'Erasmo, Pablo (2011) Government Reputation and Debt Repayment in Emerging Economies. Working paper, Federal Reserve Bank of Philadelphia.Google Scholar
Elul, Ronel (2011) Securitization and Mortgage Default. Working paper 09-21/R, Federal Reserve Bank of Philadelphia.Google Scholar
Foote, Christopher, Gerardi, Kristopher, Goette, Lorenz, and Willen, Paul S. (2009) Reducing foreclosures: No easy answers. In Acemoglu, Daron, Rogoff, Kenneth, and Woodford, Michael (eds.), NBER Macroeconomics Annual 24, pp. 89–138. Chicago: University of Chicago Press.Google Scholar
Foote, Christopher, Gerardi, Kristopher, and Willen, Paul S. (2012) Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis. Public policy discussion paper 12-2, Federal Reserve Bank of Boston.Google Scholar
Gerardi, Kristopher and Li, Wenli (2010) Mortgage foreclosure prevention efforts. Federal Reserve Bank of Atlanta Economic Review 95 (2), 1–13.Google Scholar
Gruber, Joseph and Martin, Robert (2003) Precautionary Savings and the Wealth Distribution with Illiquid Durables. Board of Governors of the Federal Reserve System international finance discussion paper 773.Google Scholar
Guler, Bulent (2015) Innovations in information technology and the mortgage market. Review of Economic Dynamics 18 (3), 456–483.Google Scholar
Harris, Milton and Holmstrom, Bengt (1982) A theory of wage dynamics. Review of Economic Studies 49 (3), 315–333.Google Scholar
Hatchondo, Juan Carlos, Martinez, Leonardo, and Sanchez, Juan M. (2014) Mortgage Defaults and Prudential Regulations in a Standard Incomplete Markets Model. Federal Reserve Bank of St. Louis working paper 2011-019C.CrossRefGoogle Scholar
Haughwout, Andrew, Peach, Richard, and Tracy, Joseph (2008) Juvenile delinquent mortgages: Bad credit or bad economy? Journal of Urban Economics 64 (2), 246–257.CrossRefGoogle Scholar
Haughwout, Andrew, Okah, Ebiere, and Tracy, Joseph (2010) Second Chances: Subprime Mortgage Modification and Re-Default. Federal Reserve Bank of New York staff report 417.Google Scholar
Jeske, Karsten, Krueger, Dirk, and Mitman, Kurt (2013) Housing, mortgage bailout guarantees and the macro economy. Journal of Monetary Economic 60 (8), 917–935.CrossRefGoogle Scholar
Jiang, Wei, Aiko Nelson, Ashlyn, and Vytlacil, Edward (2014) Securitization and loan performance: Ex ante and ex post relations in the mortgage market. Review of Financial Studies 27 (2), 454–483.Google Scholar
Keys, Benjamin J., Piskorski, Tomasz, Seru, Amit, and Vig, Vikrant (2013) Mortgage financing in the housing boom and bust. In Glaeser, Edward L. and Sinai, Todd (eds.), Housing and the Financial Crisis, pp. 143–204. Chicago and London: National Bureau of Economic Research.CrossRefGoogle Scholar
Levitin, Adam J. (2009) Helping homeowners: Modification of mortgage in bankruptcy. Harvard Law and Policy Review 3 (2), 1–9.Google Scholar
Livshits, Igor, MacGee, James, and Tertilt, Michèle (2007) Consumer bankruptcy: A fresh start. American Economic Review 97 (1), 402–418.CrossRefGoogle Scholar
Mayer, Christopher, Morrison, Edward, Piskorski, Tomasz, and Gupta, Arpit (2014) Mortgage modification and strategic default: Evidence from a legal settlement with countrywide. American Economic Review 104 (9), 2830–2857.Google Scholar
Mayer, Christopher, Pence, Karen, and Sherlund, Shane M. (2009) The rise in mortgage defaults. Journal of Economic Perspectives 23 (1), 27–50.CrossRefGoogle Scholar
Mian, Atif and Sufi, Amir (2009) The consequences of mortgage credit expansion: Evidence from the U.S. mortgage default crisis. Quarterly Journal of Economics 124 (4), 1449–1496.Google Scholar
Paul, Ron (September 23, 2008) Commentary: Bailouts will lead to rough economic ride. CNN.Google Scholar
Pennington-Cross, Anthony (2006) The value of foreclosed property. Journal of Real Estate Research 28 (2), 193–214.CrossRefGoogle Scholar
Piskorski, Tomasz, Seru, Amit, and Vig, Vikrant (2010) Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis. Journal of Financial Economics 97 (3), 369–397.Google Scholar
Posner, Eric A. and Zingales, Luigi (2009) A loan modification approach to the housing crisis. American Law and Economics Review 11 (2), 575–607.Google Scholar
Purnanandam, Amiyatosh (2011) Originate-to-distribute model and the subprime mortgage crisis. Review of Financial Studies 24 (6), 1881–1915.CrossRefGoogle Scholar
Roberts, Russell (October 3, 2008) How government stoked the mania. The Wall Street Journal.Google Scholar
Robinson, Breck (2009) An overview of the home affordable modification program. Consumer Compliance Outlook, third quarter, pp. 2, 3, 13–17.Google Scholar
Shimer, Robert (2012) Reassessing the ins and outs of unemployment. Review of Economic Dynamics 15 (2), 127–148.Google Scholar
Storesletten, Kjetil, Telmer, Christopher I., and Yaron, Amir (2004) Consumption and risk sharing over the life cycle. Journal of Monetary Economics 51 (3), 609–633.CrossRefGoogle Scholar
White, Alan M. (2008) Rewriting contracts, wholesale: Data on voluntary mortgage modifications from 2007 and 2008 remittance reports. Fordham Urban Law Journal 36 (3), 509–535.Google Scholar
Yue, Vivian Z. (2010) Sovereign default and debt renegotiation. Journal of International Economics 80 (2), 176–187.Google Scholar