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Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide

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  • Christopher J. Mayer
  • Edward Morrison
  • Tomasz Piskorski
  • Arpit Gupta

Abstract

We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide’s relative delinquency rate increased thirteen percent per month immediately after the program’s announcement. The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17065.

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Date of creation: May 2011
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Publication status: published as Mayer, Christopher, Edward Morrison, Tomasz Piskorski, and Arpit Gupta. 2014. “Mortgage Modification and Strategic Default: Evidence from a Legal Settlement with Countrywide,” January. (Forthcoming, The American Economic Review)
Handle: RePEc:nbr:nberwo:17065

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  1. Berndt, Antje & Gupta, Anurag, 2009. "Moral hazard and adverse selection in the originate-to-distribute model of bank credit," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(5), pages 725-743, July.
  2. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2011. "The Role of Securitization in Mortgage Renegotiation," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2011-2, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  3. Ronel Elul & Nicholas S. Souleles & Souphala Chomsisengphet & Dennis Glennon & Robert Hunt, 2010. "What "Triggers" Mortgage Default?," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 490-94, May.
  4. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, Elsevier, vol. 80(1), pages 123-129, July.
  5. Piskorski, Tomasz & Seru, Amit & Vig, Vikrant, 2010. "Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis," Journal of Financial Economics, Elsevier, Elsevier, vol. 97(3), pages 369-397, September.
  6. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, American Economic Association, vol. 101(5), pages 2108-31, August.
  7. Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2008. "Negative equity and foreclosure: theory and evidence," Public Policy Discussion Paper, Federal Reserve Bank of Boston 08-3, Federal Reserve Bank of Boston.
  8. repec:oup:rfinst:v:25:y::i:7:p:2071-2108 is not listed on IDEAS
  9. Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc.
  10. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 307-362, February.
  11. Tomasz Piskorski & Alexei Tchistyi, 2011. "Stochastic House Appreciation and Optimal Mortgage Lending," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 24(5), pages 1407-1446.
  12. Ethan Cohen-Cole & Jonathan Morse, 2009. "Your house or your credit card, which would you choose?: personal delinquency tradeoffs and precautionary liquidity motives," Risk and Policy Analysis Unit Working Paper, Federal Reserve Bank of Boston QAU09-5, Federal Reserve Bank of Boston.
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Cited by:
  1. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Tomasz Piskorski & Amit Seru, 2012. "Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program," NBER Working Papers 18311, National Bureau of Economic Research, Inc.
  2. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, European Finance Association, vol. 17(1), pages 1-33.
  3. Donghoon Lee & Christopher J. Mayer & Joseph Tracy, 2012. "A New Look at Second Liens," NBER Working Papers 18269, National Bureau of Economic Research, Inc.
    • Donghoon Lee & Christopher Mayer & Joseph Tracy, 2012. "A New Look at Second Liens," NBER Chapters, in: Housing and the Financial Crisis, pages 205-234 National Bureau of Economic Research, Inc.
  4. Stefan Trautmann & Razvan Vlahu, 2011. "Strategic Loan Defaults and Coordination: An Experimental Analysis," DNB Working Papers, Netherlands Central Bank, Research Department 312, Netherlands Central Bank, Research Department.
  5. Stephanie M. Wilshusen, 2011. "Meeting the demand for debt relief," Payment Cards Center Discussion Paper, Federal Reserve Bank of Philadelphia 11-04, Federal Reserve Bank of Philadelphia.
  6. Adelino, Manuel & Gerardi, Kristopher & Willen, Paul S., 2013. "Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(7), pages 835-853.
  7. Umit G. Gurun & Gregor Matvos & Amit Seru, 2013. "Advertising Expensive Mortgages," NBER Working Papers 18910, National Bureau of Economic Research, Inc.

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