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

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  • Thomas Herndon

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.

Suggested Citation

  • Thomas Herndon, 2023. "Punishment or Forgiveness? Loan Modifications in Private Label Residential Mortgage-Backed Securities from 2008 to 2014," Review of Political Economy, Taylor & Francis Journals, vol. 35(1), pages 287-315, January.
    • Handle: RePEc:taf:revpoe:v:35:y:2023:i:1:p:287-315
    DOI: 10.1080/09538259.2021.1923282
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