IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v104y2014i9p2830-57.html
   My bibliography  Save this article

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

Author

Listed:
  • Christopher 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 settlement of U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers. Using a difference-in-difference framework, we find that Countrywide's monthly delinquency rate increased more than 0.54 percentage points—a ten percent relative increase—immediately after the settlement's announcement. The estimated increase in default rates is largest among borrowers least likely to default otherwise. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs. (JEL D10, G21, G33, K00)

Suggested Citation

  • Christopher Mayer & Edward Morrison & Tomasz Piskorski & Arpit Gupta, 2014. "Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide," American Economic Review, American Economic Association, vol. 104(9), pages 2830-2857, September.
  • Handle: RePEc:aea:aecrev:v:104:y:2014:i:9:p:2830-57
    Note: DOI: 10.1257/aer.104.9.2830
    as

    Download full text from publisher

    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.104.9.2830
    Download Restriction: no

    File URL: http://www.aeaweb.org/aer/app/10409/20110594_app.pdf
    Download Restriction: no

    File URL: http://www.aeaweb.org/aer/data/10409/20110594_data.zip
    Download Restriction: no

    File URL: http://www.aeaweb.org/aer/ds/10409/20110594_ds.zip
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2011. "The role of securitization in mortgage renegotiation," Journal of Financial Economics, Elsevier, vol. 102(3), pages 559-578.
    3. Ethan Cohen-Cole & Jonathan Morse, 2009. "Your house or your credit card, which would you choose?: personal delinquency tradeoffs and precautionary liquidity motives," Supervisory Research and Analysis Working Papers QAU09-5, Federal Reserve Bank of Boston.
    4. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-2131, August.
    5. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    6. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
    7. 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, Oxford University Press, vol. 125(1), pages 307-362.
    8. Ronel Elul & Nicholas S. Souleles & Souphala Chomsisengphet & Dennis Glennon & Robert Hunt, 2010. "What "Triggers" Mortgage Default?," American Economic Review, American Economic Association, vol. 100(2), pages 490-494, May.
    9. Puhani, Patrick A., 2012. "The treatment effect, the cross difference, and the interaction term in nonlinear “difference-in-differences” models," Economics Letters, Elsevier, vol. 115(1), pages 85-87.
    10. Tomasz Piskorski & Alexei Tchistyi, 2011. "Stochastic House Appreciation and Optimal Mortgage Lending," Review of Financial Studies, Society for Financial Studies, vol. 24(5), pages 1407-1446.
    11. repec:oup:rfinst:v:25:y::i:7:p:2071-2108 is not listed on IDEAS
    12. Piskorski, Tomasz & Seru, Amit & Vig, Vikrant, 2010. "Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 369-397, September.
    13. Berndt, Antje & Gupta, Anurag, 2009. "Moral hazard and adverse selection in the originate-to-distribute model of bank credit," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 725-743, July.
    14. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Li, Xianghong & Zhao, Xinlei, 2016. "Strategic Default Induced by Loan Modification Programs," MPRA Paper 73594, University Library of Munich, Germany.
    2. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.
    3. Goodstein, Ryan & Hanouna, Paul & Ramirez, Carlos D. & Stahel, Christof W., 2017. "Contagion effects in strategic mortgage defaults," Journal of Financial Intermediation, Elsevier, vol. 30(C), pages 50-60.
    4. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Tomasz Piskorski & Amit Seru, 2017. "Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program," Journal of Political Economy, University of Chicago Press, vol. 125(3), pages 654-712.
    5. Sumit Agarwal & Itzhak Ben-David & Vincent Yao, 2015. "Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market," Management Science, INFORMS, vol. 61(9), pages 2220-2240, September.
    6. Tomasz Piskorski & Amit Seru, 2018. "Debt Relief and Slow Recovery: A Decade after Lehman," NBER Working Papers 25403, National Bureau of Economic Research, Inc.
    7. You Suk Kim & Wenli Li & Hanming Fang, 2016. "The Dynamics of Subprime Adjustable-Rate Mortgage Default: A Structural Estimation," 2016 Meeting Papers 400, Society for Economic Dynamics.
    8. Giovanni Favara & Mariassunta Giannetti, 2017. "Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market," Journal of Finance, American Finance Association, vol. 72(3), pages 1081-1118, June.
    9. Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2010. "Complex mortgages," Working Paper Series WP-2010-17, Federal Reserve Bank of Chicago.
    10. Shi, Lan & Zhang, Yan, 2015. "Appraisal inflation: Evidence from the 2009 GSE HVCC intervention," Journal of Housing Economics, Elsevier, vol. 27(C), pages 71-90.
    11. Benjamin J. Keys & Tomasz Piskorski & Amit Seru & Vikrant Vig, 2012. "Mortgage Financing in the Housing Boom and Bust," NBER Chapters, in: Housing and the Financial Crisis, pages 143-204, National Bureau of Economic Research, Inc.
    12. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Zhang, Yan, 2019. "Holdup by Junior Claimholders: Evidence from the Mortgage Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(1), pages 247-274, February.
    13. Benjamin J. Keys & Tomasz Piskorski & Amit Seru & Vincent Yao, 2014. "Mortgage Rates, Household Balance Sheets, and the Real Economy," NBER Working Papers 20561, National Bureau of Economic Research, Inc.
    14. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    15. Gene Amromin & Caitlin Kearns, 2014. "Access to Refinancing and Mortgage Interest Rates: HARPing on the Importance of Competition," Working Paper Series WP-2014-25, Federal Reserve Bank of Chicago.
    16. Fernando Ferreira & Joseph Gyourko, 2015. "A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012," NBER Working Papers 21261, National Bureau of Economic Research, Inc.
    17. Giovanni Favara, 2013. "Mortgage Market Concentration, Foreclosures and House Prices," 2013 Meeting Papers 643, Society for Economic Dynamics.
    18. Fernando Ferreira & Joseph Gyourko, 2011. "Anatomy of the Beginning of the Housing Boom: U.S. Neighborhoods and Metropolitan Areas, 1993-2009," NBER Working Papers 17374, National Bureau of Economic Research, Inc.
    19. Segura, Anatoli & Zeng, Jing, 2020. "Off-balance sheet funding, voluntary support and investment efficiency," Journal of Financial Economics, Elsevier, vol. 137(1), pages 90-107.
    20. Kruger, Samuel, 2018. "The effect of mortgage securitization on foreclosure and modification," Journal of Financial Economics, Elsevier, vol. 129(3), pages 586-607.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:104:y:2014:i:9:p:2830-57. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael P. Albert). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.