When Are Modifications of Securitized Loans Beneficial to Investors?

Gonzalo Maturana

The Review of Financial Studies, 2017, vol. 30, issue 11, 3824-3857

Abstract: Loan modification is widely discussed as an alternative to foreclosure, but little research has focused on quantifying its effect on loan performance. I quantify this effect early in the housing crisis by exploiting exogenous variation in the incentives to modify securitized nonagency loans. An additional modification reduces loan losses by 35.8% relative to the average loss; this reduction suggests that the marginal benefit of modification likely exceeded the marginal cost. Consistent with the idea that high-income borrowers may be better equipped to withstand bad economic times, I find that modifications are especially beneficial when borrowers have larger loans. Received April 25, 2016; editorial decision March 24, 2017 by Editor Philip Strahan.

JEL-codes: G01 G21 G32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (17)

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