Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide

Christopher Mayer, Edward Morrison, Tomasz Piskorski and Arpit Gupta

No 17065, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D10 G21 G33 K0 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-ban and nep-ure
Note: CF PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

Published as Mayer, Christopher, Edward Morrison, Tomasz Piskorski, and Arpit Gupta. 2014. “Mortgage Modification and Strategic Default: Evidence from a Legal Settlement with Countrywide,” January. (Forthcoming, The American Economic Review)

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Journal Article: Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide (2014)
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