The Political Economy of Loan Modification

Abstract

This paper documents that mortgage servicers increased modification rates by approximately 8 percent for delinquent loans located in a district whose representative was a member of the Financial Services Committee in the U.S. House of Representatives during the 111th Congress. We document that the difference in modification rates persists after the passage of the Dodd-Frank Act in 2010 and continues through the term of the 112th Congress. The paper's findings are consistent with lenders making politically motivated decisions in their allocation of loan modifications. Furthermore, we find little evidence that these higher modification rates benefited borrowers or the local economy.

Keywords: Political Economy, Financial Crisis, Loan Modification, Mortgages, Dodd-Frank Act

JEL Classification: D1, D72, G01, G2