Abstract

http://ssrn.com/abstract=1435597
 
 

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Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization


Manuel Adelino


Duke University - Fuqua School of Business

Kristopher Gerardi


Federal Reserve Bank of Atlanta

Paul Willen


Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

July 2009

NBER Working Paper No. w15159

Abstract:     
We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors.

Number of Pages in PDF File: 42

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Date posted: July 21, 2009  

Suggested Citation

Adelino, Manuel and Gerardi, Kristopher and Willen, Paul, Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization (July 2009). NBER Working Paper No. w15159. Available at SSRN: http://ssrn.com/abstract=1435597

Contact Information

Manuel Adelino
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
Kristopher S. Gerardi
Federal Reserve Bank of Atlanta ( email )
1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)
HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/
Paul Willen (Contact Author)
Federal Reserve Bank of Boston - Research Department ( email )
600 Atlantic Avenue
Boston, MA 02210
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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