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The effect of mortgage securitization on foreclosure and modification

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  • Kruger, Samuel

Abstract

Did securitization exacerbate the foreclosure crisis by altering mortgage servicing practices? I exploit the unanticipated freeze of private mortgage securitization in 2007 to provide new evidence that securitization increases foreclosure probability and decreases modification probability. These effects are economically large and persist over time even after implementation of the Home Affordable Modification Program (HAMP) in 2009. Using hand-collected data on the contractual terms of servicing agreements, I show that servicers typically have broad discretion to modify loans but face significant incentives favoring foreclosure. The evidence implies that securitization significantly increased foreclosure rates during and after the crisis.

Suggested Citation

  • Kruger, Samuel, 2018. "The effect of mortgage securitization on foreclosure and modification," Journal of Financial Economics, Elsevier, vol. 129(3), pages 586-607.
  • Handle: RePEc:eee:jfinec:v:129:y:2018:i:3:p:586-607
    DOI: 10.1016/j.jfineco.2018.01.008
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    Cited by:

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    2. Michelle Bergmann, 2020. "The Determinants of Mortgage Defaults in Australia – Evidence for the Double-trigger Hypothesis," RBA Research Discussion Papers rdp2020-03, Reserve Bank of Australia.
    3. 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.
    4. Fishback, Price & Fleitas, Sebastian & Rose, Jonathan & Snowden, Ken, 2020. "Collateral Damage: The Impact of Foreclosures on New Home Mortgage Lending in the 1930s," The Journal of Economic History, Cambridge University Press, vol. 80(3), pages 853-885, September.

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    More about this item

    Keywords

    Foreclosure; Loan modification; Mortgage securitization; Mortgage servicing; Financial crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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