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Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More Than Self-Cures?


  • Calem, Paul S.

    (Federal Reserve Bank of Philadelphia)

  • Jagtiani, Julapa

    (Federal Reserve Bank of Philadelphia)

  • Maingi, Ramain Quinn

    (Federal Reserve Bank of Philadelphia)

  • Abell, David

    (Federal Reserve Bank of Philadelphia)


This paper examines changes in the redefault rate of mortgages that were selected for modification during 2008–2011, compared with that of similarly situated self-cured mortgages during the same period. We find that while the performance of both modified and self-cured loans improved dramatically over this period, the decline in the redefault rate for modified loans was substantially larger, and we attribute this difference to a few key factors. First, the modification terms regarding repayments have become increasingly more generous, including more principal reduction, resulting in greater financial relief to the borrowers. Second, modifications in later vintages also benefited from improving economic conditions. Modifications became more effective as unemployment rates declined and home prices recovered. Third, we find that the difference between redefault rate improvement between modified loans and self-cured loans continue to persist even after controlling for all the relevant risk and economic factors. We attribute this difference to the servicers’ learning process — such as data collection and information sharing among industry participants — known as “learning-by doing.” Early in the mortgage crisis, many servicers had limited experience selecting the best borrowers for modification. As modification activity increased, lenders became more adept at screening borrowers for modification eligibility and in selecting appropriate modification terms. Our empirical findings suggest that mortgage modification effectiveness could be enhanced through the industry’s “learning-by-doing” process.

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  • Calem, Paul S. & Jagtiani, Julapa & Maingi, Ramain Quinn & Abell, David, 2018. "Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More Than Self-Cures?," Working Papers 18-2, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:18-2

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    mortgage modification; mortgage default; mortgage servicing;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G40 - Financial Economics - - Behavioral Finance - - - General

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