Abstract

http://ssrn.com/abstract=1690627
 
 

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Market-Based Loss Mitigation Practices for Troubled Mortgages Following the Financial Crisis


Sumit Agarwal


National University of Singapore

Gene Amromin


Federal Reserve Bank of Chicago

Itzhak Ben-David


Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Souphala Chomsisengphet


US Department of Treasury - Office of the Comptroller of the Currency (OCC)

Douglas D. Evanoff


Federal Reserve Bank of Chicago

October 11, 2010

Charles A. Dice Center Working Paper No. 2010-19
Fisher College of Business Working Paper No. 2010-03-019
FRB of Chicago Working Paper No. 2011-03

Abstract:     
The meltdown in residential real-estate prices that commenced in 2006 resulted in unprecedented mortgage delinquency rates. Until mid-2009, lenders and servicers pursued their own individual loss mitigation practices without being significantly influenced by government intervention. Using a unique dataset that precisely identifies loss mitigation actions, we study these methods-liquidation, repayment plans, loan modification, and refinancing — and analyze their effectiveness. We show that the majority of delinquent mortgages do not enter any loss mitigation program or become a part of foreclosure proceedings within 6 months of becoming distressed. We also find that it takes longer to complete foreclosures over time, potentially due to congestion. We further document large heterogeneity in practices across servicers, which is not accounted for by differences in borrower population. Consistent with the idea that securitization induces agency conflicts, we confirm that the likelihood of modification of securitized loans is up to 70% lower relative to portfolio loans. Finally, we find evidence that affordability (as opposed to strategic default due to negative equity) is the prime reason for redefault following modifications. While modification terms are more favorable for weaker borrowers, greater reductions in mortgage payments and/or interest rates are associated with lower redefault rates. Our regression estimates suggest that a 1 percentage point decline in mortgage interest rate is associated with a nearly 4 percentage point decline in default probability. This finding is consistent with the Home Affordable Modification Program (HAMP) focus on improving mortgage affordability.

Number of Pages in PDF File: 46

Keywords: Financial Crisis, Loss Mitigation, Mortgage Crisis, Lenders, Servicers, Liquidation, Modification, Repayment, Refinance, Default, Delinquency, Borrower, Interest Rates, Household Finance, Credit, Housing, FICO Score, Leverage, LTV, Loan Modification, Mortgage, GSE, HAMP, Loan Term, Loan Balance

JEL Classification: D1, D8, G1, G2

working papers series


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Date posted: October 13, 2010 ; Last revised: March 16, 2011

Suggested Citation

Agarwal, Sumit and Amromin, Gene and Ben-David, Itzhak and Chomsisengphet, Souphala and Evanoff, Douglas D., Market-Based Loss Mitigation Practices for Troubled Mortgages Following the Financial Crisis (October 11, 2010). Charles A. Dice Center Working Paper No. 2010-19; Fisher College of Business Working Paper No. 2010-03-019; FRB of Chicago Working Paper No. 2011-03. Available at SSRN: http://ssrn.com/abstract=1690627 or http://dx.doi.org/10.2139/ssrn.1690627

Contact Information

Sumit Agarwal
National University of Singapore ( email )
15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)
HOME PAGE: http://www.ushakrisna.com
Gene Amromin
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)
Itzhak Ben-David (Contact Author)
Ohio State University - Fisher College of Business, Finance Department ( email )
2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/
Souphala Chomsisengphet
US Department of Treasury - Office of the Comptroller of the Currency (OCC) ( email )
400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)
Douglas D. Evanoff
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
312-322-5814 (Phone)
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