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Residential Loan Renegotiation: Theory and Evidence

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Abstract

If loan renegotiations are not uncommon, this alternative should be modeled into the contingent claims framework of mortgage pricing. There is no direct evidence on the frequency of loan renegotiation, however. A simple model of default indicates that renegotiation should occur more frequently in conventional loans versus FHA loans and in states with higher foreclosure costs versus those with lower costs. Since empirical tests using delinquency and foreclosure placement rates demonstrate no such behavioral difference, we conclude loan renegotiation does not occur frequently enough to warrant its consideration in mortgage pricing models. The rarity of circumstances under which renegotiation is mutually beneficial may account for this funding.

Suggested Citation

  • Terrence M. Clauretie & Mel Jameson, 1995. "Residential Loan Renegotiation: Theory and Evidence," Journal of Real Estate Research, American Real Estate Society, vol. 10(2), pages 153-162.
    • Handle: RePEc:jre:issued:v:10:n:2:1995:p:153-162
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    References listed on IDEAS

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    5. James F. Epperson & James B. Kau & Donald C. Keenan & Walter J. Muller, 1985. "Pricing Default Risk in Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 261-272, September.
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    8. Clauretie, Terrence M & Herzog, Thomas N, 1990. "The Effect of State Foreclosure Laws on Loan Losses: Evidence from the Mortgage Insurance Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(2), pages 221-233, May.
    9. repec:bla:jfinan:v:44:y:1989:i:2:p:345-73 is not listed on IDEAS
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    Cited by:

    1. 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.
    2. Agarwal, Sumit & Zhang, Yunqi, 2018. "Effects of government bailouts on mortgage modification," Journal of Banking & Finance, Elsevier, vol. 93(C), pages 54-70.
    3. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2010. "Market-Based Loss Mitigation Practices for Troubled Mortgages Following the Financial Crisis," Working Paper Series 2010-19, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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