Why don't lenders renegotiate more home mortgages?: redefaults, self-cures, and securitization

Manuel Adelino, Kristopher Gerardi and Paul Willen

No 09-4, Public Policy Discussion Paper from Federal Reserve Bank of Boston

Abstract: We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment-reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small, and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors.

Keywords: Mortgage loans; Foreclosure; Financial crises; Subprime mortgage; Mortgage-backed securities (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ure
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Related works:
Journal Article: Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization (2013)
Working Paper: Why don't lenders renegotiate more home mortgages? redefaults, self-cures, and securitization (2009)
Working Paper: Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization (2009)
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