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http://ssrn.com/abstract=1836451
 
 

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Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide


Christopher J. Mayer


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Edward R. Morrison


University of Chicago - Law School

Tomasz Piskorski


Columbia Business School - Finance and Economics

Arpit Gupta


Columbia University - Columbia Business School

October 11, 2012

Columbia Law and Economics Working Paper No. 404

Abstract:     
We investigate whether homeowners respond strategically to news of mortgage modification programs by defaulting on their mortgages. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased more than ten percent per month immediately after the program's announcement. The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios. These results suggest that strategic behavior of borrowers should be an important consideration in designing mortgage modification programs.

Number of Pages in PDF File: 59

Keywords: Strategic behavior, mortgage modification, default, foreclosure crisis, Countrywide

JEL Classification: D10, G21, G33, K00

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Date posted: May 16, 2011 ; Last revised: October 12, 2012

Suggested Citation

Mayer, Christopher J. and Morrison, Edward R. and Piskorski, Tomasz and Gupta, Arpit, Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide (October 11, 2012). Columbia Law and Economics Working Paper No. 404. Available at SSRN: http://ssrn.com/abstract=1836451 or http://dx.doi.org/10.2139/ssrn.1836451

Contact Information

Christopher J. Mayer
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Edward R. Morrison
University of Chicago - Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
Tomasz Piskorski (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

Arpit Gupta
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
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