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

FRB of Boston Public Policy Discussion Paper No. 09-4

Federal Reserve Bank of Atlanta Working Paper 2009-17

41 Pages Posted: 17 Jul 2009 Last revised: 30 May 2015

See all articles by Manuel Adelino

Manuel Adelino

Duke University; Duke Innovation & Entrepreneurship Initiative; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Paul Willen

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2013

Abstract

A leading explanation for the lack of widespread mortgage renegotiation during the financial crisis is the existence of frictions in the mortgage securitization process. This paper finds little evidence that the securitization process impeded the ability of lenders to renegotiate home mortgages, in particular during the early part of the crisis. Using a nationally representative dataset on seriously delinquent mortgage borrowers from the first quarter of 2005 through the third quarter of 2008, we find similarly small renegotiation rates for securitized loans and loans held on banks' balance sheets. We offer an alternative theory that argues that information issues endemic to home mortgages, where lenders negotiate with large numbers of borrowers, lead to barriers in renegotiation that are fundamentally different from those present with other types of debt. Consistent with the theory, we show that as the informational asymmetries between borrowers and lenders became less severe over the course of the crisis, renegotiation rates increased dramatically, rising from approximately 3 percent of delinquent mortgages in early 2007 when subprime mortgages began to default in record numbers to approximately 20 percent in late 2009 at the peak of government intervention in the mortgage market.

JEL Classification: D11, D12, G21

Suggested Citation

Adelino, Manuel and Gerardi, Kristopher S. and Willen, Paul S., Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitization (January 1, 2013). Federal Reserve Bank of Atlanta Working Paper 2009-17. Available at SSRN: https://ssrn.com/abstract=1433777 or http://dx.doi.org/10.2139/ssrn.1433777

Manuel Adelino

Duke University ( email )

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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 S. 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

Register to save articles to
your library

Register

Paper statistics

Downloads
198
Abstract Views
2,422
rank
131,184
PlumX Metrics