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http://ssrn.com/abstract=2138314
 
 

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Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program


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)

Tomasz Piskorski


Columbia Business School - Finance and Economics

Amit Seru


University of Chicago - Booth School of Business

June 3, 2013

Fisher College of Business Working Paper No. 2012-03-020
Charles A. Dice Center Working Paper No. 2012-20

Abstract:     
The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program (HAMP) that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an overall increase in the intensity of renegotiations while adversely affecting the effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in the rate of foreclosures and reached just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers — which is also observed before the program — does not reflect differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, it reflects servicer-specific factors that appear to be related to their preexisting organizational capabilities. We exploit regional variation in the share of loans serviced by intermediaries with high pre-program renegotiation activity to assess the economic effects in areas more exposed to the program. Regions where HAMP was used intensively saw a lower rate of house price decline as well as an increase in the pay-down rate on consumer debt. There was no change in non-durable and durable consumption in these regions, suggesting that distressed borrowers who are in the process of debt deleveraging may have a relatively low spending multiplier from moderate debt reduction. We conclude by discussing implications of our findings for debt relief programs in general and for other policy responses to crises that also require intermediaries for implementation.

Number of Pages in PDF File: 63

Keywords: Government intervention, Debt renegotiation, Mortgage modification, Foreclosures, Housing crisis, HAMP, Servicers

JEL Classification: E60, E65, G18, G21, H3

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Date posted: August 29, 2012 ; Last revised: June 4, 2013

Suggested Citation

Agarwal, Sumit and Amromin, Gene and Ben-David, Itzhak and Chomsisengphet, Souphala and Piskorski, Tomasz and Seru, Amit, Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program (June 3, 2013). Fisher College of Business Working Paper No. 2012-03-020. Available at SSRN: http://ssrn.com/abstract=2138314 or http://dx.doi.org/10.2139/ssrn.2138314

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
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)
Tomasz Piskorski
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

Amit Seru (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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