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Effects of government bailouts on mortgage modification

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  • Agarwal, Sumit
  • Zhang, Yunqi

Abstract

This paper shows how liquidity infusions affect loan modification in the mortgage market. The design of pooling and servicing agreements leads mortgage servicers to prefer foreclosure over modification when they are liquidity constrained. Therefore, a positive liquidity shock is expected to boost modification rates. Using a residential mortgage dataset that includes loan-level information, we find that the Troubled Asset Relief Program significantly increased the modification rate. Our findings help us better understand the economic consequences of government intervention and have important policy implications for the renegotiation of distressed mortgages.

Suggested Citation

  • Agarwal, Sumit & Zhang, Yunqi, 2018. "Effects of government bailouts on mortgage modification," Journal of Banking & Finance, Elsevier, vol. 93(C), pages 54-70.
  • Handle: RePEc:eee:jbfina:v:93:y:2018:i:c:p:54-70
    DOI: 10.1016/j.jbankfin.2018.05.010
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Mortgage modification; Financial crisis; TARP; Government intervention; Liquidity;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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