Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization / Manuel Adelino, Kristopher Gerardi, Paul S. Willen.

Format:

Book

Author/Creator:

Adelino, Manuel.

Contributor:

National Bureau of Economic Research.

Gerardi, Kristopher.

Willen, Paul S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15159.

NBER working paper series no. w15159

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

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 securization: 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.

Notes:

Print version record

July 2009.