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

42 Pages Posted: 21 Jul 2009 Last revised: 4 Jun 2023

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); Nova School of Business and Economics

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: July 2009

Abstract

We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors.

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 (July 2009). NBER Working Paper No. w15159, Available at SSRN: https://ssrn.com/abstract=1435597

Manuel Adelino

Duke University ( email )

Duke Innovation & Entrepreneurship Initiative ( email )

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National Bureau of Economic Research (NBER) ( email )

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Kristopher S. Gerardi

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Paul S. Willen (Contact Author)

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National Bureau of Economic Research (NBER)

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