Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis

Vikrant Vig, Amit Seru and Tomasz Piskorski
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Tomasz Piskorski: Columbia Business School

No 1169, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: We show that delinquent loans are serviced differently depending on their securitization status. Conditional on a loan becoming seriously delinquent, we find a significantly lower foreclosure rate associated with loans held by the bank (`portfolio' loans) when compared to similar loans that are securitized; the likelihood of a portfolio loan default is lower in relative terms by about 20-30% for all the loans and about 30-50% for loans of better credit quality. This evidence supports the view that, relative to servicers of securitized loans, servicers of portfolio loans undertook actions that resulted in lower rates of foreclosure. Our findings suggest that securitization imposes significant renegotiation costs and a failure to renegotiate securitized loans may have substantially contributed to the recent surge in foreclosures. A policy intervention that allows for renegotiation of securitized loans could result in significant welfare gains.

Date: 2009
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Journal Article: Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis (2010)
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