Punishment or Forgiveness? Loan Modifications in Private Label Residential Mortgage-Backed Securities from 2008 to 2014

Thomas Herndon

Review of Political Economy, 2023, vol. 35, issue 1, 287-315

Abstract: I estimate the extent to which modifications of privately securitized mortgages increased or forgave debt during the Great Recession and aftermath, from 2008 to 2014. I find that loan modifications weakened household balance sheets by adding $20 billion to household debt, with the net amount of debt added per modification doubling from 2010 to 2014. I also find that the increase in debt is consistent with capitalization of fees, but not missed interest payments. Capitalization of fees is significant because it has been associated with a principal-agent problem between investors and mortgage servicers preventing efficient loss mitigation, as well as consumer financial protection abuses.

Date: 2023
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DOI: 10.1080/09538259.2021.1923282

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